ASIC RG 217 — ASIC Regulatory Guide – RG 217 Duty to prevent insolvent trading: Guide for directors

Page 1 REGULATORY GUIDE 217 Duty to prevent insolvent trading: Guide for directors December 2024 About this guide This guide is for directors and their professional advisers. It may also be of interest to registered liquidators and creditors. The guide sets out key principles to help directors understand and comply with their duty under s588G of the Corporations Act to prevent insolvent trading. It also provides guidance on the use of the safe harbour protection from liability for insolvent trading. Page 2 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in December 2024 and is based on legislation and key regulations as at the date of issue. Previous versions:  Superseded Regulatory Guide 217 issued July 2010 and reissued in August 2020 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 3 Contents A Overview ........................................................................................... 4 Scope of this guide ............................................................................ 4 Director’s duty to prevent insolvent trading ....................................... 5 Safe harbour protection for directors ............................................... 10 Liability of a holding company.......................................................... 11 B Key principles for directors .......................................................... 13 Carrying out their duty ..................................................................... 13 Key principle 1: Actively monitor company solvency ....................... 14 Key principle 2: Investigate financial difficulties............................... 17 Key principle 3: Obtain advice from professional advisers where necessary......................................................................................... 18 Key principle 4: Act in a timely manner ........................................... 20 C Safe harbour protection from liability for insolvent trading ..... 23 What should a director do? .............................................................. 24 When safe harbour protection will not be available ......................... 25 Developing a course of action ......................................................... 26 What debts are included in safe harbour protection? ...................... 30 Obtain appropriate advice from an appropriately qualified entity .... 31 When does safe harbour protection end? ....................................... 32 A director’s evidentiary burden to establish safe harbour protection . 32 Impact on other director’s duties ..................................................... 33 Safe harbour protection—small business restructuring ................... 34 D ASIC’s approach to insolvent trading and safe harbour ........... 35 Assessing whether a director has breached their duty .................... 35 Appendix: Indicators of potential insolvency .................................... 40 Key terms ............................................................................................... 42 Related information ............................................................................... 44 Page 4 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 4 A Overview Key points This guide is intended to help directors understand and comply with their duty to prevent insolvent trading. The information, principles, and laws contained in this guide are applicable to all directors, including directors of small-to-medium enterprises (SMEs). It sets out: • the relevant legal background (see RG 217.9–RG 217.34); • the key principles that we consider directors need to take into account in order to comply with their duty to prevent insolvent trading (see Section B; • the ‘safe harbour’ protection for directors against claims for insolvent trading (see Section C); and • guidance on how we will assess whether a director has breached their duty (see Section D). While compliance with the guide may avoid a breach of duty, we reserve our right to fully investigate the factual circumstances of each case of suspected insolvent trading and take action if we consider it appropriate. The law in relation to insolvent trading involves complex legal and accounting issues. Directors should ensure that they understand their legal obligations and, if necessary, obtain appropriate advice from a professional adviser who meets the recommended requirements (see Key principle 3: Obtain advice from professional advisers where necessary). The law relating to safe harbour also involves complex legal and accounting issues and requires advice to be obtained from an appropriately qualified entity (see RG 217.101–RG 217.116). Note: The term ‘professional adviser’ is used throughout Sections A, B and D, while in Section C the term ‘appropriately qualified entity’ is used, as this is the language of s588GA(2) of the Corporations Act 2001 (Corporations Act). Scope of this guide RG 217.1 This regulatory guide is intended to help directors understand and comply with their duty to prevent insolvent trading. It may also be of interest to company creditors, professional advisers engaged by directors to advise on insolvency, and appropriately qualified advisers engaged to advise on safe harbour. RG 217.2 It is intended to provide general guidance to directors about their duty to prevent insolvent trading. The law in relation to insolvent trading is complex Page 5 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 5 and dependent on the facts of each case. Directors should ensure that they understand their legal obligations, and if there is uncertainty, we encourage obtaining appropriate advice (see Section B). RG 217.3 The guide sets out some of the key principles directors should consider, to comply with this duty: see Section B. RG 217.4 Section C contains guidance on factors a director should consider when seeking to establish safe harbour protection against claims for insolvent trading. RG 217.5 Section D contains guidance on some of the factors we will consider in assessing whether a director has complied with their duty to prevent insolvent trading and whether the director might establish safe harbour protection against claims for insolvent trading. RG 217.6 In addition to directors and professional advisers, this guide may be of interest to registered liquidators and creditors. A registered liquidator of a company or a creditor of a company (with the consent of the company’s liquidator or the court after the end of six months, commencing when a company begins to be wound up) may bring proceedings against a director to recover compensation for loss resulting from insolvent trading (see s588R– s588T of the Corporations Act). RG 217.7 Nothing in this guide affects the legal rights of a liquidator or creditor of a company to bring such a proceeding against a director. A liquidator or creditor of a company can bring a claim against a director whether or not we have conducted an investigation or brought proceedings against the director for insolvent trading. In bringing proceedings against a director, a liquidator or creditor may consider factors other than those we will consider in assessing whether a director has complied with their duty. RG 217.8 Any claim against a director for insolvent trading must be determined by the court. A court may consider some, or all, of the key principles in Section B and the guidance in Section C. The court may consider other material matters when determining whether a director has breached their duty to prevent insolvent trading and whether the director might establish safe harbour protection against claims for insolvent trading. Director’s duty to prevent insolvent trading RG 217.9 A director has a positive duty to prevent insolvent trading under s588G of the Corporations Act. RG 217.10 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 Page 6 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 6 company. This may include, for instance, the size and complexity of the business as well as the skills and experience of the company’s management and staff. When a director is not involved, or is involved in a limited capacity, in directly overseeing the company’s financial situation and is relying on internal or external advice, the director must ensure that: (a) the management, employees and external professional advisers relied on by the director have the required level of knowledge, skill and experience necessary to undertake their functions, relative to the size and complexity of the business; (b) systems are in place and operating effectively to provide the information the director needs to ensure they are informed about the company’s affairs at all times, and are able to assess the appropriateness of the advice they receive; and (c) they make appropriate inquiries to remain informed about the financial position and affairs of the company. RG 217.11 If the company is insolvent, or there is a real risk of insolvency, the duties of directors will expand to include creditors (including employees with outstanding entitlements): see Information Sheet 42 Insolvency for directors (INFO 42). Who does the duty apply to? RG 217.12 The duty applies to all directors, both those who are appointed to the position and any alternate director they appoint and who is acting in that capacity. Note: The duty applies to directors of companies registered under the Corporations Act that are registered as a charity under the Australian Charities and Not-for-Profits Commission Act 2012 (ACNC Act). ASIC has provided guidance about the provisions of the Corporations Act that continue to apply to charities registered under the ACNC Act: See Charities registered with the ACNC. RG 217.13 The duty also applies to persons who are not formally or validly appointed as directors, but who act in the position of a director, or in accordance with whose instructions or wishes the company’s directors are accustomed to act. Note: See s9 of the Corporations Act for the definition of ‘director’, which encompasses persons who are formally appointed to the position and those who act as de facto and shadow directors. What does the duty require? RG 217.14 A director of a company is required under s588G to prevent the company from incurring a debt if: (a) a person is a director of a company at the time the company incurs a debt; and (b) the company is insolvent at the time the debt is incurred; or Page 7 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 7 (c) by incurring that debt, or by incurring a range of debts including that debt, the company becomes insolvent; and (d) at the time of incurring the debt, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent by incurring the debt (see s588G(1)). RG 217.15 Section 588G sets out two levels of contravention: (a) under s588G(2), a civil penalty provision applies to a director who fails to prevent the debt being incurred, provided they are aware that there are grounds for suspecting insolvency, or where a reasonable person in a similar position would suspect insolvency; and (b) under s588G(3), it is a criminal offence if: (i) at the time a company incurred the debt, the director suspected that the company was insolvent or would become insolvent as a result of incurring that debt; and (ii) the director’s failure to prevent the company incurring the debt was dishonest. What are the consequences of breaching the duty? RG 217.16 If a director is found by a court to have contravened the civil penalty provision in s588G(2), the court may make one or more of the following orders: (a) compensation order—the court may order that the director is personally liable to pay compensation to the company equal to the amount of the loss suffered as a result of the director failing to prevent the company from incurring debts while it was insolvent (see s588J and 1317H). (b) pecuniary penalty order—if the court finds that the director’s failure to prevent insolvent trading is serious or materially prejudices the interests of the company or the company’s ability to pay its creditors, the maximum pecuniary penalty for an individual (see s1317G) is the greater of: (i) 5,000 penalty units; or (ii) three times the benefit obtained or detriment avoided. Note: See Fines and penalties for more information about penalties, including the value of a penalty unit. (c) disqualification from managing a corporation—the court may disqualify the director from managing a corporation for a period of time that it considers appropriate, if it is satisfied that the disqualification is justified (see s206C). Page 8 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 8 Example 1: Obtaining a compensation order A liquidator was appointed to XYZ Pty Ltd and, following investigation, considered that the company was insolvent from a date 248 days before winding up. The liquidator identified 25 debts totalling $456,789 incurred in that period, which have not been paid. The liquidator also looked at what defences XYZ’s sole director had and decided they have none. The liquidator took action in court to obtain an order that the director pays an amount of $456,789 to the liquidator. The liquidator will distribute money recovered in accordance with the priorities in the Act. RG 217.17 If a director is found to have committed a criminal offence under s588G(3), a court may impose the following maximum penalties on an individual: (a) a penalty of up to 2,000 penalty units; (b) imprisonment for five years; or (c) both (a) and (b). Note: See Fines and penalties for more information about penalties, including the value of a penalty unit. What defences are available? RG 217.18 Section 588H provides a director with a number of defences to a civil claim for insolvent trading under s588G(2). Note: The business judgement rule in s180(2) does not apply to a breach of s588G. RG 217.19 A director has a defence to proceedings for a contravention of s588G(2) if it is proved that, at the time the debt was incurred, the director: (a) had reasonable grounds to expect, and did expect, that the company was solvent and would remain solvent even if it incurred the debt, or incurred a range of debts, including that debt (see s588H(2)); (b) had reasonable grounds to believe, and did believe, that a competent and reliable person who was responsible for providing adequate information about the company’s solvency was fulfilling that responsibility; and the director expected that, based on the information that person provided to the director, the company was—and would remain—solvent even if it incurred the debt, or incurred a range of debts, including that debt (see s588H(3)); (c) because of illness or other good reason, did not take part in the management of the company at that time (see s588H(4)); or (d) took all reasonable steps to prevent the company incurring the debt. Matters that may be considered when determining whether this defence is made out include, but are not limited to, any action the director took to appoint an administrator to the company or a restructuring Page 9 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 9 practitioner for the company, when that action was taken, and the results of that action (see s588H(5) and (6)). Note: A court may also relieve a director from liability (either wholly or in part) if it appears to the court that the director has acted honestly and, considering all the circumstances of the case, ought fairly to be excused: see s1317S and 1318. RG 217.20 These defences do not apply to a criminal offence under s588G(3). When is a company insolvent? RG 217.21 A company is insolvent if it is unable to pay all its debts as and when they become due and payable: see s95A. RG 217.22 Determining the company’s ability to pay its debts should be by reference to the actual circumstances of the company. Determining whether a company is insolvent predominantly involves applying a cash-flow test. This requires realistically assessing whether the company’s anticipated current and future cash flows will be sufficient to enable current and future liabilities to be paid as and when they become due and payable. Note: There are a variety of factors that should be taken into account in considering whether a company is insolvent: see Table 4 in the appendix for further details. RG 217.23 In addition, it may be relevant to look at the financial position of the company as a whole and consider other commercial factors when assessing solvency (commonly referred to as the ‘balance sheet test’). For example, it may be relevant to consider: (a) the company’s assets and liabilities as a whole, including the company’s ability to collect debts owed to it within agreed terms, and whether arrangements have been negotiated with creditors to defer payment of outstanding debts; (b) whether additional money can realistically be raised in a timely manner from the issue of additional share capital, or from future borrowings; and (c) whether there are surplus assets that can be sold in a relatively short period of time to help pay debts without damaging the company’s ability to trade and its ability to pay all its debts when they become due and payable. RG 217.24 It is important to differentiate insolvency from a temporary lack of liquidity, which may be overcome in the short term due to the successful outcome of the company’s normal business activities. See Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 and Hall v Poolman (2007) 65 ACSR 123. RG 217.25 If a company fails to keep proper financial records, and an insolvent trading claim is made against a director, the court may presume in a civil penalty proceeding (unless the director can prove otherwise) that the company was insolvent for the period of time that the company failed to keep proper Page 10 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 10 financial records: see s588E. This presumption does not apply in criminal proceedings under s588G(3). RG 217.26 Whether a company is insolvent involves the consideration of complex legal and accounting issues. Directors need to obtain and consider all relevant information about the company’s financial position and should consider obtaining appropriate advice from an appropriately qualified professional adviser if they have reasonable grounds to suspect the company is in financial difficulty: see RG 217.60. Safe harbour protection for directors RG 217.27 A director may be able to protect themselves from civil liability for insolvent trading by establishing a ‘safe harbour’ which is explained more fully in Section C. Note: Directors of companies registered under the Corporations Act that are registered as a charity under the ACNC Act may establish safe harbour protection (as set out in Section C). Course of action reasonably likely to lead to a better outcome RG 217.28 A director may have safe harbour protection and be excluded from civil liability for insolvent trading under s588GA(1) if: (a) at a particular time after the director starts to suspect the company may become or be insolvent, they start developing 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; and (b) the debt is incurred directly or indirectly in connection with any such course of action, or the debt is incurred in the ordinary course of the company’s business; and (c) the debt is incurred during the period commencing at the time the director starts to suspect the company may become or be insolvent, and they start developing one or more courses of action, and ending at the earliest of the following: (i) the end of a reasonable period of time during which the director fails to take any such course of action; (ii) when the director ceases to take any such course of action; (iii) when any such course of action ceases to be reasonably likely to lead to a better outcome for the company; or (iv) the appointment of an administrator or liquidator of the company. Page 11 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 11 RG 217.29 There are statutory factors that may (without limitation) help in establishing whether a course of action is reasonably likely to lead to a better outcome for the company: see RG 217.82. RG 217.30 A better outcome for a company is one that is better for the company than the immediate appointment of an administrator, or liquidator: see s588GA(7). RG 217.31 Directors must continually assess whether the course or courses chosen are, and remain, reasonably likely to result in an outcome that is better for the company. Company under small business restructuring RG 217.32 A director may have safe harbour protection and be excluded from civil liability for insolvent trading under s588GAAB(1) if: (a) a restructuring practitioner has been appointed to a company under s453B of the Corporations Act and the restructuring of the company has not ended under reg 5.3B.02 of the Corporations Regulations 2001 (Corporations Regulations); and (b) the debt is incurred in the ordinary course of business, or with the consent of the restructuring practitioner or by order of the court. Liability of a holding company RG 217.33 A holding company may be liable for insolvent trading by a subsidiary if: (a) the company was the holding company at the time the subsidiary incurs a debt; (b) the subsidiary: (i) is already insolvent at the time the debt was incurred, or (ii) becomes insolvent by incurring the debt, or by incurring a range of debts including that debt; (c) at the time of incurring the debt, there are reasonable grounds for suspecting that the subsidiary is already insolvent, or would become insolvent by incurring the debt; and (d) either or both of the following apply: (i) the holding company or one or more of its directors was aware at the time there were reasonable grounds for suspecting the subsidiary was insolvent or would become insolvent; and/or (ii) taking into account the nature and extent of the holding company’s control over the affairs of the subsidiary and any other relevant circumstances, it is reasonable to expect the holding company or Page 12 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 12 one or more of the holding company’s directors would be so aware (see s588V). Note: See s9 of the Corporations Act for definitions of ‘holding company’ and ‘subsidiary’ and Div 6 of Pt 1.2 of the Corporations Act for further information about subsidiaries and related bodies corporate. Safe harbour against holding company liability RG 217.34 A holding company will not be liable for debts incurred resulting from insolvent trading by a subsidiary if: (a) the holding company takes reasonable steps to ensure the safe harbour protection referred to in RG 217.27 applies to each director of the subsidiary and the debts; and (b) the safe harbour protection applies to each director and to those debts (see s588WA). Page 13 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 13 B Key principles for directors Key points This section sets out the key principles for the guidance of directors in the context of their duty to prevent insolvent trading. There are four key principles: • Key principle 1: Actively monitor company solvency; • Key principle 2: Investigate financial difficulties; • Key principle 3: Obtain advice from professional advisers where necessary; and • Key principle 4: Act in a timely manner. When a director follows these key principles, they are less likely to breach their duty to prevent the company from trading while insolvent. Carrying out their duty RG 217.35 There is a risk of directors breaching their duty to prevent insolvent trading, unless they stay informed about the financial affairs of the company at all times, including but not limited to, putting themselves in a position to assess the impact of incurring debts. RG 217.36 A director is less likely to breach their duty to prevent insolvent trading when they consider, and implement, where appropriate, the following key principles in carrying out their role: (a) Key principle 1: A director must stay informed about the financial affairs of the company, and regularly assess the company’s solvency (see RG 217.40–RG 217.50); (b) Key principle 2: As soon as they identify concerns about the company’s financial solvency, a director should take positive steps to investigate and confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties (see RG 217.51–RG 217.52); (c) Key principle 3: A director should obtain appropriate professional advice where necessary (see RG 217.53–RG 217.62); and (d) Key principle 4: A director should consider advice received and act on it appropriately in a timely manner (see RG 217.63–RG 217.72). RG 217.37 If a director does not actively follow or implement the four key principles, they are at serious risk of breaching their duty to prevent insolvent trading. Page 14 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 14 RG 217.38 On the other hand, when a director does follow the key principles set out in this guide, they are more likely to be able to demonstrate that they complied with their duty. RG 217.39 Some of the specific factors we will consider in assessing whether the director has breached their duty to prevent insolvent trading, and the evidentiary material we will look for, are set out in Table 2. Key principle 1: Actively monitor company solvency RG 217.40 Both executive directors and non-executive directors must actively monitor, and keep themselves informed about, the financial position of the company. This means the director must, among other considerations, take steps to: (a) ensure the company maintains proper financial records and prepares relevant financial information; and (b) make any other reasonable enquiries to assist the director in understanding the company’s financial position and cashflow requirements at all times. RG 217.41 Unless there is a good reason, such as those listed at RG 217.19, a director is never excused or relieved from actively monitoring the financial position of the company and its affairs. Example 2: Possible defences to monitoring solvency A director who is seriously ill and unable to attend to the affairs of the company might be excused if, during the period of their absence, the company incurs a debt that cannot be paid. Similarly, if a director is overseas and incapable of engaging in the company’s operations, and has appointed an alternate director to act in their absence, they may also be excused if, during their absence, the company incurs a debt that cannot be paid. A director will not be excused if they rely on others, such as their accountant, bookkeeper or other director, to monitor the solvency of the company without taking an active and considered interest in the business and informing themselves of the company’s financial affairs. What directors need to do RG 217.42 A director must generally monitor the company’s position for any indication that it might not be able to pay its debts as they become due and payable. To do so, a director will need to ensure that they are kept informed on an ongoing basis. Relying solely on advice or reviewing financial statements at the end of each financial year is insufficient. Page 15 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 15 RG 217.43 Some of the specific activities a director may need to undertake to ensure that they are sufficiently informed about the company’s position may include: (a) being involved in or overseeing the preparation of profit and cash-flow budgets and regular management accounts, and monitoring actual results against budget expectations; (b) reviewing the company’s ability to collect debts owed to it and to realise other current assets, including stock, on a regular basis; (c) monitoring when creditors are due to be paid and the company’s ability to comply with normal terms of trade; (d) reviewing the current level of bank lending facilities and the ability to access additional funding if required; (e) reviewing the company’s tax obligations including lodgement, compliance and ability to pay liabilities as and when they become due and payable; and (f) periodically reviewing employee entitlement obligations, including whether single touch payroll reports are lodged on time, paying superannuation and wages, and ensuring all employee entitlements are paid and accrued—accurately reflecting relevant awards, agreements or contracts. RG 217.44 The actual steps taken by a director to ensure they are kept informed will depend, in part, on all the circumstances of the company. This includes: factoring in the size and complexity of the business, as well as the skills and experience of the company’s management and staff. RG 217.45 When a director is not involved directly in overseeing the company’s day-to- day activities, they should ensure that: (a) appropriate systems are in place; (b) they make adequate inquiries to keep informed about the financial position and affairs of the company; and (c) it is appropriate to rely on the information and advice provided to them. Relying on information provided by third parties RG 217.46 A director may rely on information about the solvency of the company provided by others in certain circumstances. RG 217.47 This will generally be a person who is specifically responsible for providing information about the company’s solvency to the director (e.g. another director, chief financial officer, internal or external accountant, or professional adviser). Page 16 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 16 RG 217.48 To rely on the information provided by a particular person, the director should first establish that the person is suitably qualified (see RG 217.55), appropriately insured (where the third party is an external adviser), competent and reliable to provide information about the company’s solvency. The director should also ask sufficient questions of the person advising them to: (a) understand the financial effect of the advice they receive; and (b) be satisfied that the information on which the advice is based is up to date, accurate and complete. RG 217.49 A director is able to rely on information provided by a third party only if the party relied on is fully briefed and is given sufficient information by the director or the company to perform their task properly and adequately. RG 217.50 If information about the solvency of the company is not provided to the director as requested, or the provision of that information is repeatedly delayed or presented in an unsatisfactory or unprofessional manner, a director should consider making any necessary changes to the processes and persons responsible for providing this information. This may include obtaining appropriate input from a professional adviser, as necessary. Example 3: Neglecting to actively monitor financial activity A director who is actively involved in the day-to-day running of the company spends most of his time marketing and growing the business, and developing relationships with customers. He relies on staff to pay creditors on time. Every six months, he reviews information about the financial position of the company that is prepared by one of his employees, and makes few inquiries about the information provided to him. The director is not diligently monitoring the financial affairs of the company. He should ensure there are systems in place that let him know—at all times: • the realistic value of the assets and liabilities of the company; • whether the company can pay its debts as and when they become due and payable, and if the company is doing so; and • whether the business is trading profitably. The director’s actions might include: • ensuring realistic profit and cash-flow budgets are prepared, and monitoring cash available to pay debts; • reviewing regular management accounts and comparing actual performance to budgets; and • reviewing the aged listing of debtors and creditors to ensure that trade terms are being met. If the director or his staff do not have the skills to prepare this information, the director should consider hiring a suitably qualified bookkeeper or Page 17 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 17 accountant to maintain adequate financial records and provide regular updates of this information. Reviewing information about the company’s financial position every six months is not sufficient. Reviewing information monthly may be more appropriate for most businesses where there are no solvency concerns. If there are solvency concerns, even more frequent reviews and more regular updates about the company’s financial position are needed. This might include weekly, or even daily, review of cash at bank, as well as aged debtor and aged creditor balances. Key principle 2: Investigate financial difficulties RG 217.51 As soon as there are reasonable grounds to suspect that the company is in financial difficulty, or that there is a risk that the company is insolvent or will become insolvent as a result of incurring a debt, directors should: (a) take positive steps to confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties so the company can meet its obligations; (b) ensure that systems are in place to carefully consider the company’s solvency before the company incurs each new debt; and (c) obtain advice from a professional adviser, if necessary. What directors need to do RG 217.52 Table 2 in the appendix sets out some of the factors that a reasonable person would take into account when monitoring the company’s position and assessing whether a company is insolvent. Positive steps to confirm the company’s financial position may also include those suggested at RG 217.43. Example 4: Investigating indicators of potential insolvency XYZ Pty Ltd is being pushed for payment by a number of creditors, and a few payments have been declined by the bank because there were insufficient funds. Although most of the critical supplier creditors are being paid on normal terms, the company is unable to pay a creditor with whom it had negotiated an extended repayment arrangement. In addition, XYZ has recently received a notice from the Australian Taxation Office detailing an outstanding debt. Outstanding statutory liabilities, payments being declined by the bank and trade creditors not being paid on agreed terms are all significant indicators of potential insolvency. Page 18 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 18 In this example, to help avoid potential insolvency the directors of XYZ should: • fully inform themselves about all the relevant facts and the financial position of the company; • realistically assess the options available; • obtain appropriate advice about how they might deal with the current financial difficulties; and then • consider and act appropriately on that advice in a timely manner. Key principle 3: Obtain advice from professional advisers where necessary RG 217.53 As soon as there are reasonable grounds to suspect that the company is in financial difficulty, a director should consider obtaining appropriate advice. Advice should be sought from one or more appropriately qualified, appropriately insured, competent and reliable professional advisers about the financial position of the company and how the financial difficulties can be addressed. RG 217.54 A director is potentially able to rely on appropriate advice in circumstances where the professional adviser is given full, complete, accurate and up-to-date instructions by, or on behalf of, the director to enable the adviser to properly and adequately provide competent advice. What directors need to do RG 217.55 In addition to relying on suitably qualified, competent and reliable management and staff (where available), a director may obtain appropriate professional advice from a number of sources. It is the responsibility of the director to seek out the appropriate advice from the adviser or advisers and act on that advice in a timely manner. RG 217.56 An appropriate professional adviser should be someone who: (a) is practicing as one or more of the professionals listed in RG 217.59; (b) is a member of a professional body; (c) holds appropriate insurance; and (d) has the necessary experience in the relevant field of insolvency. RG 217.57 A person on ASIC’s banned and disqualified persons register, or someone who has a current court enforceable undertaking, is unlikely to be considered a suitable professional adviser. Page 19 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 19 RG 217.58 The appropriate qualifications of the adviser will depend on the nature of the advice being sought, in addition to the individual circumstances of the company. RG 217.59 A professional adviser might be one or more of the following persons who can provide appropriate advice to the director, such as a: (a) registered liquidator; or (b) lawyer; or (c) accountant. Note: Lists of Registered Liquidators by state showing their name and firm can be found at Insolvency statistics—Series 4A Registered liquidator lists. Individual names can be searched on the ASIC Professional Register of Registered Liquidators via login to ASIC Connect. RG 217.60 It is the responsibility of the director to seek out the appropriate professional adviser or advisers, to receive the advice that is best suited to the current circumstances of the company. Regard must be given to experience, qualifications, and the reasonableness of any assumptions on which the advice is based. RG 217.61 Directors should consider obtaining advice on: (a) the solvency of the company and whether there is a risk that the company is trading while insolvent; (b) the options available to the company to deal with its financial difficulties; and (c) whether it is realistically possible for the company to continue to trade while attempting to restructure the company’s affairs to enable it to meet its obligations (including whether it can renegotiate its obligations) and return the company to long-term financial health. RG 217.62 Advisers may also be able to assist directors to prepare cash flow budgets and negotiate with creditors. Example 5: Initiating independent inquiries about solvency PQR Pty Ltd is in financial distress and is negotiating with its bank to extend its credit facility. The bank has appointed an investigating accountant to advise on whether the extension should be granted and further funds advanced to the company. The directors of PQR have other factors to consider beyond the company’s financial standing with the bank. For example, PQR also has a large debt to unsecured noteholders due at the end of the year, and a number of its trade creditors are outside of trading terms. Directors need to consider the solvency of the company as a whole and ensure that all debts (including outstanding employee entitlements and superannuation contributions) can be paid as and when they become due Page 20 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 20 and payable, while also ensuring that sufficient funds will be available to repay unsecured noteholders at the end of the year. The directors should not rely on the bank’s advisers, but should make their own inquiries and obtain independent professional advice concerning the company’s solvency and ability to meet its debts as and when they become due and payable. Key principle 4: Act in a timely manner RG 217.63 If there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent by incurring a debt, the director should act in a timely manner to seek advice and implement it. RG 217.64 A director should consider the advice (including any qualifications and the reasonableness of any assumptions on which the advice is based) and take timely and appropriate action. What directors need to do Where there are doubts about the company’s solvency RG 217.65 If the advice received is that the company, although not yet insolvent, is experiencing financial difficulties and may soon become insolvent, action is still likely to be required on the director’s behalf—for example, to address the cause of any temporary lack of liquidity. RG 217.66 If there are reasonable grounds to expect that the financial position of the company will further deteriorate, the director is at risk of breaching their duty to prevent insolvent trading if they do not take immediate steps. This may include obtaining further advice and preventing the company from incurring further debts or seeking the appointment of an external administrator, in appropriate circumstances. RG 217.67 The director should continue to monitor the financial position of the company closely. They should be prepared to take further action as soon as they suspect the company’s ability to meet its debts as they become due and payable is deteriorating. RG 217.68 If the directors implement a course of action that is reasonably likely to lead to a better outcome for the company (see Section C), they should carefully monitor trading to ensure the company’s ability to meet its debts as and when they become due and payable does not deteriorate, and that the course of action continues to be reasonably likely to lead to a better outcome for the company. Page 21 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 21 Where the company is already insolvent RG 217.69 If the advice received is that the company is insolvent, the director must take immediate action. This may involve obtaining further advice from a professional adviser, such as one listed in RG 217.59. RG 217.70 Above all, if a director knows, or has reasonable grounds to suspect, that the company is incurring debts that it will not be able to pay, or they cannot rely on safe harbour, they should take all reasonable steps to prevent incurring further debts. These steps must be clear, positive and unequivocal. Such steps might include: (a) actively seeking to persuade, in writing, the other directors not to incur the debt; (b) convening a meeting of the board of directors to discuss and resolve that the debt should not be incurred, and ensuring that the minutes accurately reflect the attempts made to prevent the debt being incurred; (c) obtaining appropriate advice as to what they should do if the other directors resolve to incur the debt despite the director’s dissent; (d) suspending trading activities. RG 217.71 Where there are reasonable grounds to suspect that the company is insolvent, as well as taking steps not to incur further debts, directors should obtain and consider advice about the options available to them to deal with the company’s financial difficulties. RG 217.72 Where there are reasonable grounds to expect that the company cannot pay its debts as and when they become due and payable or develop a course of action that is reasonably likely to lead to a better outcome for the company (than the immediate appointment of an administrator or liquidator), based on the advice the directors receive, the directors should consider the immediate appointment of an external administrator to the company (see Section C). Example 6: Selecting restructure options when insolvent DEF Pty Ltd has experienced cash flow difficulties. The company is considering the restructure of its affairs and is considering a marketing program to sell certain business assets to raise sufficient cash to repay its debts, which are now due. As markets are currently depressed, asset values are down. DEF has been unable to borrow further money to help pay its debts. Depending on the amount realised from the sale of business assets, DEF may not be able to pay all its debts as and when they become due and payable by relying on this plan. In circumstances where a company needs to sell off its business assets to pay its debts, and it is unlikely there will be enough funds to repay all the creditors, there is a significant risk of insolvency. Directors in this situation Page 22 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 22 run the risk of trading while insolvent during the period of any attempted restructuring. The directors of DEF need to consider the time it will take the company to realise the assets, the effect of the sale of assets on the company’s ability to continue to trade, and the effect the sale of assets will have on future cash flows. They should obtain appropriate advice from one or more professional advisers to consider whether they are able to satisfy their duties and obligations by applying this strategy, and must carefully monitor its progress, if implemented. If this plan is commenced (which would require negotiating a deferral in repayment of existing debts during the period of the asset restructuring) and it becomes apparent that the plan may not be fully successful in returning the company to long-term financial health, the directors should immediately obtain further advice about the various courses of action available to them. Such action may include considering whether a course or courses of action can be developed that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator and, if not, the appointment of an external administrator. Page 23 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 23 C Safe harbour protection from liability for insolvent trading Key points In addition to a director’s defences against civil liability for insolvent trading (see RG 217.18–RG 217.19), a director may be able to establish safe harbour protection from civil liability for insolvent trading. Safe harbour protection will only be available to a director if: • at the time the debt was incurred, the company is paying its employees on time and complying with its lodgement obligations under taxation laws—this requirement is subject to some exceptions; and • the director is taking steps to develop and implement a course or courses of action that are reasonably likely to lead to a better outcome for the company. A better outcome for the company is one that is better than the immediate appointment of an administrator or liquidator. Specific actions taken by a director that may help them to establish a course of action that is reasonably likely to lead to a better outcome for the company may include properly informing themselves about the company’s financial position, keeping appropriate financial records, and obtaining advice from an appropriately qualified entity. A director who wants to rely on the safe harbour protection in proceedings bears the evidential burden of establishing that the protection applies. Safe harbour protection is also available to a director of a company during the period a restructuring practitioner is appointed under s453A of the Corporations Act. RG 217.73 Safe harbour protection against civil liability for insolvent trading only applies to a director who, after beginning to suspect their company is insolvent or may become insolvent, starts developing 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 to the company. Note: Safe harbour protection applies to directors of companies registered under the Corporations Act that are registered as a charity under the Australian Charities and Not- for-Profits Commission Act 2012 (ACNC Act). ASIC has provided guidance about the provisions of the Corporations Act that continue to apply to charities registered under the ACNC Act: See Charities registered with the ACNC. RG 217.74 Consistent with the key principles set out in Section B, a director should actively monitor the solvency of the company and act in a timely manner to investigate financial difficulties. The safe harbour may protect a director, who Page 24 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 24 acts early, from potential civil liability for insolvent trading and provides the time and flexibility to consider options to potentially restructure the company. What should a director do? RG 217.75 A director may be able to rely on safe harbour protection if they: (a) ensure that none of the factors that prevent safe harbour protection from operating exist (see RG 217.77); (b) start developing one or 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 (see RG 217.80); (c) ensure that only debts directly or indirectly connected to the course or courses of action are incurred, or ensure that only debts are incurred in the ordinary course of the company’s business (see RG 217.96– RG 217.100); (d) when the course of action, or any subsequent or amended course of action, is no longer reasonably likely to lead to a better outcome for the company, consider the immediate appointment of an external administrator to the company or, when an external administrator is not to be appointed, immediately cease incurring debts (see RG 217.107); (e) ensure the steps the director has taken to develop and implement the course or courses of action are adequately documented so that supporting evidence can be available if necessary (see RG 217.108– RG 217.110). RG 217.76 A director wishing to rely on safe harbour protection from liability bears the onus of pointing to the course(s) of action taken leading to an improved outcome. Therefore, a director should document decisions and retain supporting evidence, to be made available later. Example 7: Evidencing steps taken in relation to safe harbour protection The director of XYZ Pty Ltd has taken the steps outlined at RG 217.75. To have available the appropriate evidence created at the time the action happened—to support any future claim to safe harbour protection—the director has also: • prepared and kept an up-to-date financial forecast and accompanying analysis that helps her form a view that a course of action was reasonably likely to lead to a better outcome; • signed a minute of her belief that the company is in safe harbour from the date she believes she satisfied all criteria; • noted on financial forecasts that they form part of a safe harbour course of action and the date it commenced; Page 25 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 25 • created a document setting out details of the course(s) of action and included a commencement date; • documented the steps she takes to monitor the progress of the course(s) of action; and • for each debt incurred, maintained an internal note that they were consistent with the course(s) of action. If XYZ ultimately goes into liquidation, and the liquidator makes a claim for compensation for insolvent trading against the director, she can make the evidence available to the liquidator to support her claim that she has a defence. The liquidator reviews the evidence to determine whether: • the course of action she proposed and documented was realistic, given all the circumstances; • the financial forecasts were realistic; and • the proposed turnaround supported by evidence. When safe harbour protection will not be available RG 217.77 Unless the court otherwise orders, safe harbour protection will not apply to a director if, at the time the debt was incurred, the company is failing to: (a) pay the entitlements of its employees (including superannuation contributions payable by the company) that are due and payable; or (b) comply with its lodgement obligations under the taxation laws (within the meaning of the Income Tax Assessment Act 1997), and that failure: (c) amounts to less than substantial compliance; or (d) is one of two or more failures to do any or all of those matters in the last 12 months (see s588GA(4) and 588GA(6)). RG 217.78 The safe harbour protection was not intended to apply if the company is either serially failing to meet its obligations, or if there has been a serious failure by the company to substantially meet its obligation to pay employees or meet tax reporting obligations. Note: See the Explanatory Memorandum to the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 at paragraph 1.79. RG 217.79 Unless the court orders otherwise, safe harbour protection also will not apply in relation to a debt if, after the debt is incurred, a controller, administrator or liquidator is appointed to the company and the director fails to comply (or substantially comply) with their obligation to provide to the: (a) controller—a report about the affairs of the corporation (s429(2)(b)); Page 26 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 26 (b) administrator—a report about the company’s business, property, affairs, and financial circumstances (s438B(2)); or (c) liquidator—a report about the affairs of the company (s475(1) and 497(4)), and deliver to the liquidator the books in their possession relating to the company’s affairs, tell the liquidator the location of any other books of the company and otherwise be available to the liquidator and provide information about the company’s business as the liquidator reasonably requires (s530A) (see also s588GA(5) and 588GA(6)). Developing a course of action RG 217.80 A director may develop one or more courses of action that are reasonably likely to lead to a better outcome for the company. It is important that directors have a proper basis for deciding on a course or courses of action, based on obtaining advice from an appropriately qualified entity, if appropriate, and documenting the basis for the adoption and implementation of the course of action. RG 217.81 A course of action could include some or all of the following aspects: (a) undertaking a business review (b) undertaking capital raising or a debt-for-equity swap; (c) executing a plan to compromise or restructure debt facilities; (d) addressing operational issues that are negatively affecting the financial position of the company; (e) implementing cost-saving initiatives; (f) negotiating or compromising key creditor claims or building support for a restructuring plan with key creditors and stakeholders; (g) renegotiating better supplier terms or standstill agreements while refinancing is achieved; (h) preparing for the subsequent appointment of a registered liquidator to implement a company restructure through a form of external administration, to provide for a better return to creditors than might have been achieved had the appointment been made immediately; (i) if eligible, preparing for the appointment of a small business restructuring practitioner (see RG 217.114); and (j) sale of the company’s non-core or even core business, in appropriate circumstances. What is a better outcome? RG 217.82 A better outcome for the company means an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company (see s588GA(7)). Page 27 REGULATORY GUIDE 217: Duty to prevent insolvent trading: Guide for directors © Australian Securities and Investments Commission December 2024 Page 27 RG 217.83 There are statutory factors that may (without limitation) help in establishing whether a course of action is reasonably likely to lead to a better outcome for the company—that is, whether the director seeking to rely on the safe harbour provisions is: (a) is properly informing themselves about the company’s financial position; (b) taking appropriate steps to prevent misconduct by the company’s officers and employees that could adversely affect the company’s ability to pay all its debts; (c) taking appropriate steps to ensure the company maintains appropriate financial records consistent with the size and nature of the company; (d) obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or (e) developing or implementing a plan f