a sharper focus on insolvency

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

A sharper focus on insolvency

 

ASIC is taking a much stronger interest in insolvency and directors failing to do their duty will quickly find themselves in court says commissioner Professor Berna Collier

 

ASIC takes a particular interest in insolvency issues, and has recently increased its focus on the problem. This has particular implications for directors of companies.
 From a director’s perspective, a key issue is the potential personal liability for your company trading while insolvent, contrary to section 588G of the Corporations Act. Directors can be liable for both criminal and civil action for insolvent trading, as cases such as Waterwheel demonstrate.
ASIC will continue to take action against insolvent trading but it is in the interests of all stakeholders associated with a company, including directors, shareholders and creditors, if potential problems can be addressed before the company becomes insolvent.
The National Insolvency Co-ordination Unit has been established by ASIC to investigate complaints about the possible insolvency of a company.
Among other things it recommends remedial action by the directors including seeking professional advice, or it recommends intervention by ASIC by appointing an insolvency practitioner to the company if the directors are unable, or unwilling, to act.
In 2004-05 the unit visited almost 500 companies which ASIC suspected of trading while insolvent.
The regulator hears about such companies from a number of sources including direct complaints, market intelligence and referrals from within ASIC.
External administrators were appointed to 63 of those companies including five listed entities.
A visit by the unit in these circumstances is not the “kiss of death”. In some of the companies visited by NICU directors were able to keep operating despite doubts about their solvency.
Concerns about the accuracy of one company’s internal management accounts prompted a visit. It was suggested that the directors engage an insolvency practitioner to review their business.
The review highlighted that the financial position was significantly worse than represented by the management accounts and emphasised the importance of timely and reliable information to enable informed decision making.
In another case directors of a building company sought the services of mid-sized chartered accounting firms to assist and prepare up to date cashflows and financial accounts. The company was facing cashflow shortages and the advice helped them obtain further funds to complete a major project.
Directors must not fall into the trap of assuming that, although a company is in financial difficulties, by “hanging on a bit longer” the problems will be rectified.
Delay can damage your company and you personally and may reduce the options available to enable the company’s survival.
Directors may expose themselves to criminal prosecution, substantial fines or to action by a liquidator, creditors of the company or ASIC to recover amounts lost by creditors because of their actions. Personal, as well as company, assets may be at risk.
Common signs of financial trouble are:
• low operating profits or cash flow from the main business;
• problems paying trade suppliers and other creditors on time;
• trade suppliers refusing to extend further credit;
• problems meeting loan repayments on time or difficulty in keeping within overdraft limits; and
• legal action taken, or threatened, by trade suppliers or other creditors over money owed to them.
If a company does become insolvent however, it is very important that directors co-operate with the liquidator, receiver or administrator appointed.
Under the Corporations Act the directors and secretary of an insolvent company must, if requested, prepare a “Report as to Affairs” for the insolvency practitioner, setting out information specified.
A failure to co-operate is an offence, and ASIC has a zero tolerance policy towards contraventions. A failure to cooperate may result, ultimately, in ASIC taking directors before a court.
Penalties can range from fines to jail terms. 
ASIC will soon be issuing a package of general insolvency information sheets for directors, shareholders and creditors involved in the insolvency process.
These will be available on our website, www.asic.gov.au/insolvency along with more information on our increased focus on insolvency.