The following is reproduced by kind permission of ASIC ©
Since early January ASIC, through its newly formed National Insolvency Co-ordination Unit (NICU), has been working with senior insolvency specialists from Pricewaterhouse Coopers and Ernst & Young in both Sydney and Melbourne, to target directors involved with companies suspected of insolvent trading.
ASIC is testing a focused approach to dealing with possible insolvent trading before it occurs, in addition to prosecuting directors after a company has failed.
'The program aims to make company directors aware of their company's financial position, to encourage them to seek advice from insolvency professionals and where necessary, to take action to appoint voluntary administrators or liquidators to companies that are insolvent', ASIC Executive Director Public and Commercial Services, Mr. Mark Drysdale said.
The companies targeted in the program range in size from small proprietary companies to listed entities. They have been identified through a range of sources, including complaints received from the public, as well as referrals from other programs within ASIC.
ASIC has identified some key operational and financial practices which, in combination with other practices, indicate a company is at significant risk of insolvency. These include:
'Although the pilot is only for six months, the initial results have been very encouraging. ASIC is considering undertaking similar activities on a national basis', Mr. Drysdale said.
During the process of visiting companies to assess solvency, a number of directors have been assisting ASIC to assess the true financial position of corporate groups. They are currently preparing detailed management accounts to demonstrate the true financial position of the companies of interest to ASIC.
'Already, one listed group has made an announcement to the Australian Stock Exchange regarding its solvency, following a visit from ASIC', Mr. Drysdale said.
ASIC is reminding directors that Section 180 of the Corporations Act requires them to exercise a degree of care and diligence in the discharge of their duties. This includes taking steps to ensure they are properly informed about the financial position of the company and, ensuring the company does not trade while insolvent.
'Insolvent trading causes significant hardship to the business community, and imposes significant costs to the Australian economy through unpaid taxes, superannuation, and losses to legitimate business'.
'Proper accounting and legal advice can avoid many insolvencies, and ASIC urges accountants and lawyers to have a proactive role in advising their corporate clients.'
'Directors and advisors must be held accountable for irresponsible corporate decision-making, and ASIC will ensure that directors of companies who fail to comply with the law are prosecuted', Mr. Drysdale said.
Section 588G of the Corporations Act states that where a director fails to prevent a company incurring a debt when the company is insolvent, that officer will be guilty of an offence known as insolvent trading.
A breach of this provision can attract both criminal and civil penalties, including pecuniary penalties of up to $220,000 and imprisonment for up to five years, or both. In addition, compensation proceedings may be initiated by ASIC, a liquidator or creditors against a director personally, in reparation of the debt.
*The above are examples only and are not to be taken as a comprehensive list of indicators of insolvency problems.