Insolvent trading

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Introduction to "trading while insolvent"

In many legal systems, once a company becomes insolvent, the directors have to take particular care.

Under UK law, trading while insolvent can trigger several provisions under the Insolvency Act 1986 which may have the effect of making directors of a company personally liable to contribute to the assets of a company.

Australian directors duty to prevent insolvent trading

ASIC has released a Consultation Paper outlining proposed guidance to directors on their duty to prevent insolvent trading.

The Corporations Act imposes a positive duty on directors to prevent insolvent trading.

ASIC wishes to ensure that directors, particularly those in small-to-medium enterprises in financial difficulty, fully understand this duty.

The proposed guidance, contained in Consultation Paper 124 Directors’ duty to prevent insolvent trading: Guide for directors (CP 124), sets out the relevant legal background to the duty to prevent insolvent trading and the key principles that ASIC considers directors need to take into account in performing their duty to prevent insolvent trading.

Those principles are that a director:

  • must keep him or herself informed about the financial affairs of the company and regularly assess the company’s solvency;
  • immediately on identifying concerns about the company’s viability, should take positive steps to confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties;
  • should obtain appropriate advice from a suitably qualified person; and
  • should consider and act appropriately on the advice received in a timely manner.

The guidance includes information about ASIC’s approach to insolvent trading and describes some of the factors ASIC will take into account, and the evidentiary material it will look at, in assessing whether there has been a breach of the insolvent trading provisions.

By providing guidance, ASIC seeks to assist directors both understand their duty to prevent insolvent trading and also, what they can do to minimise the risk that they will breach their duty.

ASIC is seeking feedback on these proposals by 22 January 2010.

Download a copy of the consultation paper and draft regulatory guide

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