Introduction
In December 2024, Australian Securities and Investments Commission (ASIC) released an updated version of Regulatory Guide RG 217. The guidance is designed to assist directors in complying with their duty to prevent insolvent trading. It sets out four key principles for directors to avoid insolvent trading, explains the safe harbour defence (which offers protection from personal liability), and clarifies ASIC’s approach to assessing breaches of duty and the application of the safe harbour defence.
While not legally determinative, ASIC’s guidance offers insight into how the regulator may approach investigations into potential breaches.
Directors' Legal Obligations
Under section 588G of the Corporations Act 2001 (Cth), directors have a legal duty to prevent their company from incurring debts while it is insolvent or likely to become insolvent. Breaches of this duty may result in personal liability for company debts, civil penalties, or even criminal charges in cases involving dishonesty.
Directors may rely on statutory defences under section 588H, such as having relied on competent advice, being absent due to illness, or having taken reasonable steps to prevent the incurring of debts. Holding companies may also be liable where they permit a subsidiary to trade whilst insolvent.
Importantly, the duty applies not only to formally appointed directors but also to shadow and de facto directors – including certain managers, investors, and advisers.
Key Principles to Avoid Insolvent Trading
ASIC’s four guiding principles to help directors avoid liability for insolvent trading are:
1. Actively Monitor Company Solvency
Directors must regularly review cash flow, budgets, and debt obligations. Accurate and up-to-date financial records are essential to assess the company’s capacity to meet both current and foreseeable liabilities.
2. Investigate Financial Difficulties
When signs of financial distress emerge, directors must act promptly to assess the company’s financial position and identify available options. Where necessary, professional advice should be sought.
3. Seek Professional Advice
Directors should engage appropriately qualified, experienced, and insured advisers (such as accountants, lawyers, or insolvency practitioners) as soon as there are reasonable grounds to suspect financial difficulty. This advice should cover insolvent trading risks, available strategic options, and the feasibility of ongoing trading.
Given the risk of personal liability, directors should consider retaining independent legal counsel.
4. Act in a Timely Manner
Directors must take swift and decisive action based on advice received, ensuring that decisions and their rationale are thoroughly documented. If insolvency is suspected, or the financial position is expected to deteriorate further, immediate steps must be taken to prevent the incurring of additional debts.
Safe Harbour Protection
ASIC provides detailed guidance on how directors can access safe harbour protection, which shields them from personal civil liability if they pursue a course of action that is reasonably likely to lead to a better outcome for the company than immediate external administration.
Course of Action
A viable course of action must be strategic, documented, and aimed at improving financial viability. This may include restructuring operations, raising capital, renegotiating debt, or implementing cost-saving initiatives – all supported by expert advice and financial analysis.
Better Outcome
A “better outcome” means a result that improves the company’s position more than an immediate appointment of an administrator or liquidator. Directors must base this assessment on reliable and accurate information relevant to the company’s specific circumstances. Regular review and adaptation of the strategy are essential.
Reasonably Likely
ASIC considers a course of action to be “reasonably likely” to lead to a better outcome if it:
- Is based on accurate and relevant information;
- Is developed using sound judgement; and
- Is objectively reasonable given the company’s financial situation.
Directors must demonstrate that the strategy is evidence-based, practical, and not merely speculative. Financial forecasts, market analysis, and expert reports can support this position.
If at any stage the strategy no longer meets the “reasonably likely” threshold, directors must cease incurring debts and consider appointing an external administrator.
When Is Safe Harbour Unavilable?
Safe harbour does not apply if:
- The company fails to comply with tax lodgement obligations or to pay some employee entitlements (such as superannuation); or
- Directors withhold essential company records from a controller, administrator, or liquidator.
When Does Safe Harbour End?
Protection under safe harbour ceases if:
- Directors fail to commence the strategy within a reasonable time;
- Directors stop taking active steps toward the better outcome;
- The strategy ceases to be reasonably likely to succeed; or
- An external administrator is appointed.
ASIC's Approach to Enforcement
ASIC will assess director conduct by examining adherence to its guiding principles, the quality and viability of recovery strategies, and the reliability of supporting documentation. Section D of RG 217 includes practical examples of compliant and non-compliant behaviour, offering directors further insight.
Key Takeaways
- 2024 saw a notable increase in formal external administrations. With 2025 forecast to bring further corporate distress, boards must closely monitor their companies’ financial health – particularly in the light of global pressures such as international trade tensions.
- Directors should ensure that directors’ and officers’ (D&O) insurance is in place and, if possible, confirm that policies do not include insolvency exclusions.
- Companies must remain current with ATO lodgements and employee entitlement payments – especially superannuation – to maintain eligibility for safe harbour.
- Given the speed at which companies can accrue debt, early intervention is essential. Boards should seek timely advice at the first sign of solvency concerns.
- Boards must also regularly review aged creditors and monitor for payment demands and statutory demands.
Further Information
For more information about insolvent trading, safe harbour and directors’ duties, please the authors of this article:
