ASIC issues insolvent trading guidelines for directors

Directors who are concerned about the financial viability of their business must seek financial advice in order to be given leniency by the Australian Securities and Investments Commission if the company falls into insolvency, an industry expert has warned.

The comments come as ASIC released a draft regulatory paper yesterday outlining ways for directors to identify whether their businesses are insolvent and what steps to take in order to avoid a business collapse.

Michael Fingland, managing director of Vantage Performance, says the document contains some unusual rhetoric that is specifically harsh towards directors who believe they are following a solid business plan but actually drive their company into insolvency.

“This consultation paper seems to backtrack a bit on ASIC’s philosophy earlier in the year. For the last six months we heard that there might be leniency and a strengthening of a defense for directors, but now that may not be the case.”

Fingland says that while company directors were previously required to seek legal and professional advice regarding a company’s financial viability, the new regulatory draft says directors must seek financial advice as quickly as possible.

“We propose to issue guidance that, where there are reasonable grounds to suspect the company is in financial difficulty, or is insolvent or will become insolvent, a director should investigate the company’s financial position and realistically assess the options available to the company to deal with the financial difficulties,” the paper said.

“That is the biggest change in this paper,” Fingland said. “The main purpose of this is to really emphasise that directors should be doing all they can to protect the business and themselves, and if this is enforced it will lead to lower insolvency rates.”

The paper comes just after the release of the latest ASIC statistics, which show 7,212 companies collapsed in the year to September, representing a 12% increase from the previous year. Fingland says this number will fall if more directors are forced to seek financial advice in order to gain protection if the company fails.

Additionally, the paper recommends that directors must keep themselves informed about the company’s financial affairs and be “informed on an ongoing basis”.

Both executive and non-executive directors must be involved in monitoring the financial position of the company, and “unless there is a good reason, a director is never excused or relieved from actively participating in the company’s management”.

The paper also says that directors should investigate financial difficulties immediately, seek appropriate professional advice and “consider and act appropriately on the advice received, in a timely manner”.

But Fingland says these requirements are much stricter than they have been in the past, and that ASIC will not necessarily provide a defence for directors who believe they are doing the right thing but have not sought out financial advice.

Additionally, directors of businesses trading while insolvent who followed ASIC’s guidelines may not necessarily escape being investigated.

“Earlier in the year they were talking about providing some protection for directors who believed they were doing the right thing… they were seeking advice, sticking to the plan, etc. But there is a much harder line, and it is confusing.”

“They are also going to take a much order line on liquidator’s fees and administrator’s fees and be a lot more scrupulous on making sure those fees are fair and legal.”

Fingland recommends directors follow ASIC’s advice and immediately seek financial guidance if they suspect their businesses are trading while insolvent, saying early intervention can save money and jobs.

“Businesses need to look at the early warning signs and then if there is a question mark, look at the viability of the business, seek advice and if there is early enough intervention then things may be able to be saved.”