ASIC warns directors on insolvent trading duties

The Australian Securities and Investment Commission has released a new guide warning company directors what the corporate watchdog will be looking when it decides whether or not to investigate board members of collapsed company.

ASIC’s new Duty to prevent insolvent trading: Guide for directors has been released just weeks after new data showed a sharp rise in corporate collapses during May, with 914 firms placed in the hands of administrators during the month, up 19.4% from April.

ASIC Commissioner Michael Dwyer says the guide has been developed to help directors deal with post-downturn conditions.

“It is important that directors focus on their obligations to prevent insolvent trading and we expect this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility.”

Directors who breach insolvent trading laws can face pecuniary penalties of up to $200,000, plus disqualifications from acting as a director or managing a company.

The guide sets out four key principles that directors of struggling firms to follow to avoid beaching their duties:

– Directors must remain informed

ASIC says directors must “actively monitor, and keep themselves informed about, the financial position of the company.” As well as ensuring that a company keeps proper financial records and relevant financial information, ASIC says directors must have “an understanding of the financial position and cash flow requirements of the company at all times”.

– Directors should investigate financial difficulties

If a director thinks might be getting ugly, they need to act. ASIC says two steps must be taken. First, directors must “take positive steps to confirm the company’s financial position” and then examine options to deal with the financial problems at hand. Secondly, ASIC wants directors to “ensure that systems are in place to carefully consider the company’s solvency before the company incurs each new debt”. This puts a big onus on a director of a battling company to get heavily involved with the firm, and really keep an eye on every bit of spending it may do.

– Directors should obtain advice

When a director senses financial trouble, they should immediately be working the phones to get “appropriate advice from a suitably qualified, competent and reliable person about the financial position of the company and how the financial difficulties can be addressed.” The positive here is that directors can rely on this advice, providing the adviser is given a “full, complete, accurate and up-to-date instructions”.

– Directors should act in a timely manner

Put simply, if the director thinks the company is insolvent, ASIC wants to see the director take “active, timely and genuine steps to prevent the debt being incurred”. The corporate watchdog says it will examine company material including “board minutes and correspondence indicating whether the director expressed concern at the incurring of further debts” as well as internal documents showing whether the company could pay its debts.

The message of the guide is clear: where directors have even the slightest inkling that a company is struggling to pay its debts as they fall due, they need to become heavily involved in the company’s affairs.

However, ASIC’s new document comes with a caveat – following these four principles is no guarantee the director of a collapsed firm will be immune from further prosecution.

“It should be noted that this is a Regulatory Guide from ASIC as to its intended policy on this issue and in no way affects any action that may be taken by creditors or a liquidator against directors who may have traded while insolvent. The Courts ultimately determine whether a director has breached their duty to prevent the company from incurring debts when insolvent,” Dwyer said.