On 6 December 2024, the Australian Securities and Investments Commission (ASIC) issued an updated regulatory guide for directors and their professional advisers on the duty to prevent insolvent trading, including new guidance on the safe harbour defence. The updated Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors (RG 217) follows a consultation process conducted with registered liquidators, professional bodies, and other interested parties earlier in 2024 seeking input on the proposed changes. The updated guidance replaces previous guidance issued in 2010 and reissued in 2020.

The key differences since the previous guidance issued by ASIC in 2020 are:

• ASIC has inserted extensive guidance on safe harbour protection in Part A and C of RG 217, as well as adding factors that ASIC will consider when assessing whether a director may establish safe harbour protection
• ASIC has included additional practical examples to provide further assistance directors and their professional advisors
• ASIC has provided further guidance on obtaining professional advice in Part B of RG 217

RG 217 offers guidance to directors and their professional advisers on understanding and fulfilling the duty to prevent insolvent trading, guidance for directors seeking to utilise safe harbour protections, and provides a list of factors that ASIC will consider when determining whether a director has breached their duty to prevent insolvent trading or whether they may rely on safe harbour protection.

The key points directors need to be aware of from ASIC's guidance on these issues are:

Duty to prevent insolvent trading – directors should consider the following four key principles:

• Actively monitor company solvency – directors must actively monitor, and keep themselves informed about, the financial position of the company. This may include overseeing the preparation of profit and cash-flow budgets and monitoring actual results against expectations; regularly reviewing the company's ability to collect debts and what other funding is available such as lending facilities; and monitoring when the company's debts are due and ability to comply
• Investigate financial difficulties - directors must take prompt and positive steps to confirm the company’s financial position as soon as there are reasonable grounds to suspect financial difficulties or insolvency risk
• Obtain advice - directors must seek appropriate advice from appropriately qualified, appropriately insured, competent and reliable professional advisers, such as registered liquidators, lawyers, or accountants as soon as there are reasonable grounds to suspect the company is in financial difficulty. Directors should consider obtaining advice on: the company’s solvency and insolvent trading risk; the options available to the company to deal with its financial difficulties; and whether it is possible for the company to continue to trade while undergoing restructuring.
• Act in a timely manner - directors should carefully consider any advice received and take prompt appropriate action. If the company is already insolvent, directors must take immediate steps, such as obtaining further advice or preventing the company from incurring further debts. It is important that the rationale for any actions and advice received be documented and recorded.

Safe harbour defence:

• The safe harbour provisions provide directors with a defence against insolvent trading if they start developing a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.
• Course of action - a director may develop one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator. The directors must have a proper basis for deciding on a course or courses of action, based on advice from an appropriately qualified entity and documenting the basis for adopting and implementing the course of action. Courses of action could include some or all the following: conducting a business review; raising capital or executing a debt-for-equity swap; restructuring or compromising debt facilities; addressing operational issues affecting the company’s financial position; implementing cost-saving measures; negotiating with key creditors or stakeholders; preparing for the appointment of a registered liquidator; selling non-core or core business assets if appropriate.
• What is a better outcome? A better outcome means an outcome that is better for the company than the immediate appointment of an administrator or liquidator. In turn, this will vary depending on the company’s circumstances at the time and will include matters such as the size and financial position of the company, the industry in which the company operates and the complexity of issues affecting the company’s viability. It will require considered and meaningful analysis based on accurate and reliable information, and in most cases will include advice from an appropriately qualified entity. It will involve proactive consideration and continuous assessment of the courses of action that might be available, and evaluation of whether the courses of action are reasonably likely to lead to a better outcome, and if necessary the courses of action may change if there is new information or unexpected issues.
• What does reasonably likely mean? A course of action is reasonably likely to lead to a better outcome for the company if the course of action is based on relevant and accurate information, is developed using good judgment, and is objectively reasonable in the company’s circumstances. ASIC's guidance references the Explanatory Memorandum from when the safe harbour provisions were introduced, which notes the phrase “reasonably likely” does not require a better than 50 per cent chance of a better outcome than the immediate appointment of an administrator or liquidator. “Reasonably likely” requires that there is a chance of achieving a better outcome that is not fanciful or remote, but is “fair”, “sufficient” or “worth noting”.
• If the course(s) of action (including any amendments) do not continue to satisfy the ‘reasonably likely’ test, safe harbour protection is unlikely to continue.
• The guidance provides practical examples of actions which are not likely to lead to better outcomes, including: ignoring expert advice, significantly and unsustainably discounting stock, continuing to trade as usual, drawing down bank facilities or ordering more stock from creditors, knowing the debts cannot be repaid in full.

ASIC's approach to insolvent trading and safe harbour

To assess whether a director has breached their duty to prevent insolvent trading, ASIC will look at a number of factors including the extent to which a director has followed the key principles set out in RG 217. Some of these factors and examples of evidentiary material are set out in a table included in RG 217.

• To assess whether a director may rely on safe harbour protection and be excluded from insolvent trading liability, ASIC will consider a number of specific factors. Some of these factors and examples of evidentiary material are set out in a table included in RG 217.

Please see our more detailed summary of RG 217  and our earlier director's guide to insolvency and the safe harbour defence.

MinterEllison provides full service legal and consultancy services with extensive experience in directors duties, insolvent trading and safe harbour. Please contact us if you would like assistance in understanding and implementing your obligations.