ASIC has updated its regulatory guide for directors and their professional advisers on the duty to prevent insolvent trading – s 588G Corporations Act – and has provided new guidance on the safe harbour provisions – ss 588GA-588HA.
RG 217
ASIC says that the updates to Regulatory Guide 217 Duty to prevent insolvency trading: Guide for directors (RG 217) follow its consultation with liquidators, industry bodies, and other interested parties to seek their input on the proposed changes.
RG 217 provides guidance for directors and their professional advisers to help them understand and comply with the duty to prevent insolvent trading. It also provides guidance for directors who wish to rely on safe harbour protections.
ASIC notes that there have been several developments that have influenced the need for updates to RG 217, including the 2017 introduction of safe harbour provisions and the recommendations from Treasury’s Review of the Insolvent Trading Safe Harbour in 2021 to update RG 217 to provide plain English ‘best practice guidance’ and to include references to the safe harbour provisions.
SMEs
While ASIC has noted that most trading companies are in the SME sector, it decided that separate guidance was not appropriate for SME directors.
“As a director’s duty to prevent insolvent trading applies to all directors, adding more tailored guidance may add unnecessary regulatory complexity or overlap”.
As a consequence, RG 217 is very detailed and lengthy, the guidance noting that “the law in relation to insolvent trading involves complex legal and accounting issues”, as does the law relating to safe harbour.
ASIC says that directors should ensure that they understand their legal obligations and obtain advice or information as relevant from a professional adviser such as a liquidator, lawyer or accountant,
Legal advice itself may only be obtained from a lawyer: Legal Profession Uniform Law (NSW) 2014.
Law reform
Insolvent trading and safe harbour were the subject of the 2023 PJC Report on Corporate Insolvency’s recommendation 7 [7.101] that the government implement all recommendations from the Safe Harbour Review and consider referring the remainder of safe harbour reform issues identified in the PJC’s report to a comprehensive review.
Recommendation 20 [10.54] was that the comprehensive review examine the operation of the insolvent trading regime and its impact on the broader corporate insolvency framework. This was based on various submissions that conduct of “directors trading on their companies and incurring debt long past the point a business was viable” led to damage “inflicted on creditors, the economy, and directors themselves”.
Other views about insolvent trading laws are mixed, ranging from its general ineffectiveness as a deterrent in particular in the SME sector, its costly and complex evidentiary requirements, and that the incidence of insolvent trading is over-stated. There is also an absence of data from liquidators as to insolvent trading’s financial benefit to creditors, and as to safe harbour’s impact in assisting insolvent businesses. Search Results for “”insolvent trading”” – Murrays Legal
Any comprehensive review of insolvency law would no doubt examine the operation of the insolvent trading provisions. In the meantime, ASIC’s RG 217 may be of assistance.
