The Australian Securities and Investments Commission (ASIC) has released an updated Regulatory Guide 217: Guidance on insolvent trading safe harbour for feedback. The key update is the inclusion of how a director can enter a safe harbour when their entity is or is about to become, insolvent.

Must or may seek advice

The legislation indicates regard would be given by a court to whether a director obtained advice in assessing the application of the safe harbour, importantly, a director is not required to.

In the updated RG 217, key principle 3, indicates directors may seek advice yet key principle 4 assumes advice is sought. This may lead directors to understand they must seek advice.

Similarly, paragraph RG 217.67 in the guide lists the statutory factors that a court may consider when assessing if a director has entered a safe harbour. While the legislation has the word ‘or’ after each factor, the guide omits ‘or’ so could be read that all factors must be met.

While we do think seeking advice early and from an appropriately qualified entity is beneficial, the guide should be consistent, and reflect the legislation, on what a director MUST do and what a director MAY do.

Directors of SMEs

ASIC poses the question if the guidance would help directors of both small-to-medium enterprises (SMEs) and large or listed companies. One option is to develop a second guide, specifically for directors of SMEs.

We do not support a second guide for directors of SMEs as, by necessity, it would need to contain the same information. Instead, we suggest areas that can be streamlined and recommend the addition of simple flowcharts.

With a view to streamlining RG 217, we highlight matters that have been repeated and suggest they are provided once and in the most appropriate section. 

For example, in the section What debts are included in safe harbour protection, paragraph RG 217.81 talks to a director acting decisively and in a timely manner. Yet to act decisively and in a timely manner has been provided several times in previous sections: Part B Key principle 4; RG 217.31 (d); RG 217.32; RG 217.50; RG 217.61(d). Removing repeated guidance will help reduce the overall length of the guide and minimise possible misunderstandings when the same guidance is framed in slightly different language.

Noting the consistent feedback from members who reviewed the updated RG 217, that it was very dense, we also suggest providing simple flow charts at the start of key sections. Firstly, outline the steps a director must take to monitor solvency and prevent an entity from trading while insolvent. Secondly, the steps a director must take to enter a safe harbour and, if required, prove this course of action in court.

Conclusion

We support the inclusion of safe harbour in RG 217 and see ASIC as the first port of call for directors seeking guidance on preventing insolvent trading. We also note that, for our members, we will continue to provide support and education on identifying and managing financial stress and advocate for a grant for directors of small businesses to get a financial health check.

We thank our members for taking the time to review the updated RG217 and provide constructive feedback.