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Directors’ Duties
ASIC has released a consultation paper aimed at giving guidance to directors about their duty to prevent insolvent trading.
Directors’ Duties
ASIC has released a consultation paper aimed at giving guidance to directors about their duty to prevent insolvent trading. The aim is to ensure that directors, particularly in small to medium enterprises understand their obligations. The paper details the legal principles, directors must take into account to ensure they avoid liability for insolvent trading.
On 24 November 2009, ASIC released Consultation Paper 124 - Duty to prevent insolvent trading: Guide for directors. Although the Consultation Paper is intended for discussion purposes and seeks feedback by January 2010, it is useful for directors who want to know more about their duties and what they must do when acting as directors of companies. In the paper, ASIC’s sets out its current views on the requirements which directors must meet to avoid liability for insolvent trading.
Section 588G of the Corporations Act 2001 imposes a duty on directors to prevent insolvent trading by their company. The duty extends not only to directors who have been formally appointed but also to persons who act in the same way as a director or exercise control of a company, even though they are not actually appointed as directors.
If a director fails to prevent their company incurring debts when it cannot pay its debts or incurring a debt which causes the company to become insolvent, then the director can be liable to civil penalties and, where their conduct is dishonest, criminal penalties.
Section 588H of the Act provides a limited number of defences to a director who is accused of breaching their statutory duty to prevent insolvent trading. Those defences include:
• Having reasonable grounds to expect and actually expecting that the company would remain solvent;
• Having reasonable grounds to believe (and in fact believing) that someone else who is “competent and reliable” and responsible for providing adequate information about the company’s solvency and was actually carrying out that role properly and, based on the information they provided, the director expected that the company was and would remain solvent;
• The director did not take part in the management of the company because of illness or another “good reason” (which does not include simply leaving it to other directors to manage the company);
• Taking “all reasonable steps” to prevent the company incurring the debt, including for example, appointing an administrator promptly if the company becomes insolvent.
None of these defences are available if the director was acting dishonestly at the time.
The ASIC Consultation Paper provides guidance on steps directors should take to ensure that they comply with their duty to avoid insolvent trading. These steps include:
• Ensuring that proper books and records are kept by the company and remaining “properly and fully informed” about the financial affairs of the company at all times, so that they can always form a reasonable view about the company’s present financial viability and the impact of incurring any further debts;
• Keeping themselves informed about the financial affairs of the company and regularly assessing the company’s solvency;
• If they identify any concerns about the company’s financial viability, taking positive steps to confirm the company’s financial position and realistically assessing the options available to deal with its financial difficulties;
• Obtaining appropriate professional advice and acting appropriately on the advice received, in a timely manner. This could include, for example, appointing an administrator promptly if the accounting advice received by the director is that the company is insolvent.
The Consultation Paper sets out a useful list of the factors which ASIC will take into account in assessing whether a director has breached their duty to prevent insolvent trading. It also sets out a list of indicators of potential insolvency as a guide for directors.
A copy of the paper can be found on ASIC’s website: ASIC Consultation Paper 124
If you are a director of a company, you need to be aware of your obligations and the risks involved in failing to comply with these and other statutory duties.
For further information, contact: