ASIC's National Insolvent Trading Program
What is the National Insolvent Trading Program?
What are the aims of the program?
How is a company selected for review?
What are some key indicators of insolvency?
What obligations does a director have if their company is selected for review?
Who should attend a review?
What does a review entail?
Will books and records be taken by ASIC officers?
What will be the outcome of a review?
Media releases and speeches about the Program
What is the National Insolvent Trading Program?
The National Insolvent Trading Program is a focused approach to dealing with possible insolvent trading before it occurs. It involves a review of a company for the purposes of ensuring compliance by directors of their duties as set out in section 180 of the Corporations Act 2001 (the Act) and directors' duties to prevent insolvent trading under section 588G of the Act.
The program is a new initiative from ASIC's National Insolvency Coordination Unit (NICU), which is responsible for the coordination of insolvency activities undertaken by ASIC.
The national program follows on from the successful pilot project conducted in Sydney and Melbourne from January to June of 2003, with the assistance of senior insolvency specialists from PricewaterhouseCoopers and Ernst & Young. The extension to the program was made possible by the Federal Governments' Budget allocation of $12.3 million over the next four years for ASIC's continuing corporate insolvency work.
What are the aims of the program?
The program aims to:
- make company directors aware of their company’s financial position
- make directors of potentially insolvent companies aware of their responsibilities and the implications of continued trading if they know they’re insolvent
- encourage directors to seek external advice from accountants and lawyers on restructuring, and
- encourage directors to seek advice from insolvency professionals where appropriate, and to take action to appoint a voluntary administrator or liquidator where necessary.
How is a company selected for review?
A number of sources are used to identify the companies selected for the program, including:
- complaints we receive from the public, including complaints from credit managers and company employees
- listed companies that have their annual accounts reviewed as part of our accounts surveillance program and are identified as financially-stressed
- information from liquidators, and
- referrals from other areas within ASIC.
What are some key indicators of insolvency?
A company is considered to be insolvent when it is unable to pay its debts as and when they fall due. From our work to date, we have identified some key operational and financial practices, which, in combination with other practices, indicate a company is at significant risk of insolvency. They include:*
- poor cash flow, or no cash flow forecasts
- disorganised internal accounting procedures
- incomplete financial records
- absence of budgets and corporate plans
- continued loss-making activity
- accumulating debt and excess liabilities over assets
- default on loan or interest payments
- increased monitoring and/or involvement of financier
- outstanding creditors of more than 90 days
- instalment arrangements entered into to repay trade creditors
- judgement debts
- significant unpaid tax and superannuation liabilities
- difficulties in obtaining finance
- difficulties in realising current assets (eg stock, debtors)
- loss of key management personnel.
*This is not an exhaustive list of indicators of insolvency problems.
What obligations does a director have if their company is selected for review?
A director is required to provide all documents requested under a notice issued under either Section 30 or 33 of the ASIC Act. Generally the review will take place at the principal place of business of the company, however, in certain circumstances, notices can also be complied with by delivering records directly to an ASIC office.
Who should attend a review?
The Managing Director should attend a review, however, where appropriate, other directors, finance staff, external accountants and lawyers may also attend.
What does a review entail?
A review is not an audit or an investigation. It is initiated for the purposes of ensuring compliance by directors with certain duties under the Act, and it involves a discussion of the financial position of the company with the directors, and a review of historical financial records, current financial records and forecasts.
Will books and records be taken by ASIC officers?
Generally most of the books and records requested will be retained by ASIC officers, and will be returned at a later date. Usually copies of documents will suffice, however it may sometimes be necessary to take original documents. A receipt will be provided for all records taken.
What will be the outcome of a review?
On completion of our review, we may write to the company setting out our concerns about its potential insolvency. To assist with the assessment of a company's financial position we may ask that the company prepare up to date management accounts. Where appropriate, we may ask that the company approach an insolvency professional for advice on the possible appointment of an external administrator. This approach seeks to encourage directors to be proactive in discharging their responsibilities to the company's stakeholders.
In certain cases ASIC may take action directly. Cases of suspected breaches of the insolvent trading provisions of the Corporations Act, and where directors are not seeking to comply with their responsibilities in this area, are considered for possible enforcement action.
Media releases about the Program
More about insolvency and liquidators
ASIC Website: Printed 09/03/2010
