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Corporate and Commercial Update: Director's Duties

As you may be aware, on 29 July 2010, ASIC released a regulatory guide on a company director's duty to prevent insolvent trading. The guide is intended to assist company directors to understand and comply with their duty under the Corporations Act 2001 to prevent insolvent trading.

The duty arises from section 588G of the Corporations Act 2001, which requires a director of a company to prevent the company from incurring a debt if the company is insolvent, or if the company will become insolvent by incurring the debt or a range of debts including that debt.

A copy of the ASIC guide, Regulatory guide 217 Duty to prevent insolvent trading: Guide for directors (RG 217) can be accessed from teh ASIC website at www.asic.gov.au/rg.

RG 217 is divided into three sections:

  • Section A: explains the relevant legal background;

  • Section B: outlines the key principles that ASIC considers directors need to take into account in order to comply with their duty to prevent insolvent trading: and

  • Section C: provides guidance, using a series of tables, on how ASIC will assess whether a director has breached their duty.

The key principles outlined in Section B, can be summarised as follows; to meet their obligations to prevent insolvent trading directors should:

  • Inform themselves about the company's financial position and affairs;

  • Assess the company's solvency on a regular basis and immediately investigate any financial difficulties uncovered;

  • Where necessary obtain appropriate professional advice to help address the company's financial difficulties; and

  • Consider and act in a timely manner on the advice.

ASIC has noted that "the actual steps taken by a director to comply with their duty to prevent insolvent trading will depend, in part, on all the circumstances of the company, including the size and complexity of the business as well as the skills and experience of the company's management staff". (RG 217.3)

RG 217 points out that if a director of a company follows the key principles outlines, they are less likely to breach their duty to prevent the company trading while insolvent.

However, it warns that the law in relation to insolvent trading involves complex legal and accounting issues and company directors should ensure they understand their legal obligations and, if necessary, obtain appropriate advice.

If you have any queries or concerns regarding the operation of the insolvent trading provisions or director's duties under the Corporations Act 2001, please contact FAL and we will be happy to discuss any questions you may have.

14 August 2010