ASIC releases valuable guidance on insolvent trading

In a move designed to help directors better understand their statutory duty to prevent insolvent trading, ASIC last week released Consultation Paper 124 – Directors’ duty to prevent insolvent trading: Guide for directors (Consultation Paper).

The Consultation Paper outlines the regulator’s approach to insolvent trading, setting out the factors it will look at and the evidentiary material it will analyse in assessing whether a director has breached the insolvent trading provisions of the Corporations Act.

Key principles

The Consultation Paper proposes four key principles to which directors should adhere in discharging their positive duty to prevent insolvent trading. In line with those principles, directors should:

• keep themselves informed about the company’s solvency;
• investigate financial difficulties immediately;
• seek appropriate professional advice; and
• consider and act appropriately on advice received, in a timely manner.

The Consultation Paper also provides a helpful overview of the current law with respect to determining insolvency. A bullet-point list of factors is included in the guidance, the existence of which in a business may bring into question solvency issues.

Valuable guidance

While ASIC has reiterated that the specific facts of each case will take primacy in assessing whether a director has breached his or her duty to prevent insolvent trading, the Consultation Paper makes it clear that where a director follows these key principles, there is less likelihood of breaching the duty to prevent insolvent trading.

ASIC is seeking feedback on the Consultation Paper by 22 January 2010.

The process will be watched keenly by many, particularly by directors and advisers seeking to gain an insight into ASIC’s approach to a very pertinent area of the law.

A link to the Consultation Paper is available here: <http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/CP124.pdf/$file/CP124.pdf>.