On 13 October 2010 ASIC released the National Insolvent Trading Program (NITP) Report, which sets out key messages, promoting greater director responsibility by encouraging directors to remain properly and fully informed about a company’s financial affairs, and to be aware of the implications of insolvent trading; and to seek (timely) professional advice from accountants, lawyers and insolvency practitioners.

After consulting over 1500 companies displaying solvency concerns, ASIC has identified several possible insolvency indicators including:

Internal indicators

  • A history of continuing trading losses, cash flow difficulties or difficulties in selling its stock, or collecting debts  
  • Creditors not being paid on agreed trading terms  
  • Not paying Commonwealth and state taxes  
  • Cheques being returned dishonoured  
  • Unable to produce timely financial information showing the company’s financial position  
  • There are concerns about the ability to meet financial obligations.  
  • No certainty assets can be sold for funds in a short period without affecting profitable trade.

External indicators

  • Legal action is threatened or has commenced against the company, in relation to outstanding debts.  
  • The company has reached the limits of its funding facilities and is unable to obtain appropriate further finance to fund operations.  
  • The company auditor has qualified their audit opinion on the grounds that there is uncertainty about whether the company can continue as a going concern.

Outcomes

The NITP has facilitated positive outcomes by encouraging better practices guiding directors as to:

  • Improved financial information - to make informed decisions about a company’s financial position. 
  • Fundraising - to obtain finance by transparent/accountable fundraising options/processes.  
  • Refinancing – to examine optional loans/banking facilities to obtain additional working capital.  
  • Restructuring – to seek appropriate professional advice for insights  
  • Regulatory Compliance – to fully understand and comply with directors duties

Key Messages For Directors

Four key messages are now stressed as basic duties:

1. Maintain appropriate books and records

Ensure proper books and records are kept by the company and take reasonable steps to keep properly and fully informed about the company’s financial affairs.

2. Identify insolvency concerns and assess available options

Where there are reasonable grounds to suspect financial difficulty:

  1. take positive steps to confirm the company’s financial position and realistically assess the options available; and  
  2. carefully consider the company’s solvency before incurring new debts.  

3. Seek professional advice

Where there are reasonable grounds to suspect financial difficulty, obtain appropriate advice from suitably qualified, competent and reliable persons about the financial position of the company and how the financial difficulties can be addressed.  

4. Act in a timely manner

Where there are reasonable grounds to suspect the company is insolvent, take steps not to incur further debts and obtain and consider advice about the options available to deal with the company’s financial difficulties.  

Where there are reasonable grounds to expect that the company cannot pay its debts based on the advice received, directors should consider the immediate appointment of an external administrator to the company.

If, based on advice, a restructuring plan is adopted, directors should continue to monitor trading to ensure the company is able to meet debts.