On 6 December 2024, the Australian Securities & Investments Commission (ASIC) updated its Regulatory Guide: Duty to prevent insolvent trading: Guide for directors (RG 217).
The guide contains key principles intended to help directors comply with their duty to prevent insolvent trading and how to establish safe harbour protection through proactive monitoring and timely action.
What is RG 217 and what has changed?
RG 217 is a regulatory guide for company directors and their professional advisers that includes guidance on factors a director should be aware of in respect of a company potentially trading whilst insolvent.
Some of the key changes made to the updated guide are:
practical examples of courses of actions and their likely outcomes;
relevant factors to establish safe harbour protection; and
guidance on obtaining professional advice and criteria of professional advisers.
Four key principles to prevent insolvent trading
RG 217 sets out four key principles that directors should follow when carrying out their roles:
1. Actively monitor company solvency
Both directors and non-executive directors must actively monitor and be informed about the financial position of the company.
The directors must take steps to ensure the company maintains proper financial records and make any other reasonable enquiries to assist in understanding the company’s financial position and cashflow requirements at all times.
Some of the specific activities a director may need undertake to ensure that they are sufficiently informed about the company’s position may include:
overseeing the preparation of profit and cash-flow budgets, and monitoring actual results against budget expectations;
reviewing the company’s ability to collect debts and realise current assets;
monitoring when creditors are due to be paid;
reviewing the company’s tax obligations, current level of bank lending facilities and employee entitlement obligations.
A director may rely on information about the solvency from another director, accounts or professional adviser. However, the director should establish that the person is suitably qualified and ask sufficient questions to understand the financial effect.
2. Investigate financial difficulties
When there are reasonable grounds to suspect financial difficulties or insolvency risk, directors should:
take positive steps to confirm the company’s financial position;
ensure that systems are in place to consider the company’s solvency; and
obtain advice from a professional adviser if necessary.
3. Obtain advice from professional advisers where necessary
Director should consider obtaining appropriate advice from appropriately qualified, insured, competent and reliable professional advisers about the financial position of the company. A professional adviser can be a registered liquidator; a lawyer or an accountant.
Directors should consider obtaining advice on:
the solvency and of the company;
the options available to the company to deal with the financial difficulties; and
whether it is possible for the company to continue trading.
4. Act in a timely manner
To prevent insolvent trading, the director needs to act in a timely manner to seek advice and implement it.
If the company is already insolvent, the director must take immediate action to seek advice and prevent the company from incurring further debts.
Safe harbour protection
Safe harbour protection is a defence against civil liability for insolvent trading.
It only applies if the director develops one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.
RG 217 sets out that a director may be able to rely on safe harbour protection if they:
ensure that none of the factors that prevent safe harbour protection from operating exist;
develop one ore more courses of action that are reasonably likely to result in a better outcome for the company than the immediate appointment of an administrator or liquidator;
ensure that only debts directly or indirectly connected to the course of courses of action are incurred;
when the course of action developed is no longer likely to lead to a better outcome for the company, consider the immediate appointment of an external administrator to the company or immediately cease incurring debts; and
ensure that the steps the director has taken are adequately documents and supporting evidence is available if necessary.
Safe harbour protection will not apply if the company is failing to:
pay the entitlements of its employees that are due and payable; or
comply with its lodgement obligations under the taxation laws.
What does it mean for directors
For directors, RG 217 emphasises the importance of being proactive in managing their company's financial health and safeguarding against insolvent trading.
Directors must remain vigilant about the company's solvency, stay informed on its financial status, and take timely action when financial difficulties arise for the company.
If you are unsure about the next courses of action for your company or need help assessing the financial positions of the company we highly recommend that you engage qualified, competent advisers such as accountants, insolvency practitioners and lawyers, to assess the company’s solvency and explore available options, including whether the safe harbour is available.
If you would like to discuss this article or any financial issues you are having, please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Ben Wyatt
Principal Lawyer
T: +61 3 9611 0115 | M: +61 409 173 928
bwyatt@sladen.com.au
Inshani Ward
Senior Associate
T: +61 3 9611 0110 | M: +61 413 557 157
E: iward@sladen.com.au
Samuel Zhang
Law Graduate
E: szhang@sladen.com.au
