Written by Padmini Saheb in July, 2010

The Consultation Paper 124 issued by ASIC in November 2009 outlines proposals to help Directors understand and comply with their duty to prevent Insolvent Trading. Section C of the Consultation Paper provides guidance on how ASIC will assess whether a Director has breached his/her duty to prevent Insolvent Trading. This Section also demonstrates the importance of a Company maintaining proper Books and Records, and the need for the Directors to actively monitor the solvency of the Company. The common indicators of potential insolvency that ASIC will look for in assessing whether insolvency existed at a particular time include the following:-

• the company has a history of continuing trading losses;
• the company is experiencing cash-flow difficulties;
• the company is experiencing difficulties selling its stock, collecting debts owed to it;
• creditors are not being paid on agreed trading terms and/or are either placing the company on cash- on –delivery terms requiring special payments on existing debts, before they will supply further goods and services;
• the company is not paying its Commonwealth and state taxes when due (e.g. Pay-as-you-go instalments , Payroll Tax, Goods and Services Tax).
• cheques are being returned dishonoured.
• legal action is threatened or commenced against the company, or judgements are entered 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—for example, through:

− negotiating a new limit with its current financier; or

−refinancing or raising money from another party.

• the company is unable to produce accurate financial information on a timely basis that shows the company’s trading performance and financial position or that can be used to prepare reliable financial forecasts.
• company directors have resigned, citing concerns about the financial position of the company or its ability to produce accurate financial information on the company’s affairs.
• the company auditor has qualified their audit opinion on the grounds there is uncertainty that the company can continue as a going concern.
• the company has defaulted, or is likely to default, on its agreements with its financier.
• the company’s financier has appointed an investigative accountant to advise the financier about its funding exposure to the company.
• employees, or the company’s bookkeeper, accountant or financial controller, have raised concerns about the company’s ability to meet, and continue to meet, its financial obligations.
• it is not certain that there are assets that can be sold in a relatively short period of time to provide funds to help meet debts owed, without affecting the company’s ongoing ability to continue to trade profitably.

• the company is holding back cheques for payment or issuing post-dated cheques.

ASIC suggests, and so do we, that in the event that a company is displaying the above indicators that professional advice should be sort at the earliest instance. At Condon Associates we have the necessary skill set to assess this matter for you.