ASIC guidance to directors on their duty to prevent insolvent trading

One of the most difficult roles of a director is to determine whether the company is insolvent.

ASIC has released a Consultation Paper outlining proposed guidance to directors on their duty to prevent insolvent trading: Consultation Paper 124 Directors’ duty to prevent insolvent trading: Guide for directors (CP 124).

ASIC’s draft Regulatory Guide refers to the core principles 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 draft guide sets out defences and contains guidance including information about ASIC’s approach to insolvent trading and 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.

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

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