Recent changes in the Australian regulation of third-party funders will have a dramatic effect on the funding of certain disputes. Although these changes were accompanied by Government and industry commentary that they would not affect litigation funding for insolvency-related claims, this may not be the case for all insolvency funding arrangements.
The COVID-19 pandemic and the associated lock downs have led to a global economic slowdown, and Australia has been no exception. GDP fell by 0.3% in the March quarter, and on 3 June 2020 Treasurer Josh Frydenberg announced that Australia was officially in its first recession in 29 years.
While the Australian Government was quick to provide a range of economic support measures – having already spent $289bn or 14.6% of GDP in an attempt to keep the economy afloat – Treasury expects Australia's GDP will decline by 0.5% in 2019-20 and a further 2.5% in 2020-21.
On 24 November 2009, ASIC released Consultation Paper 124 which provides guidance for directors on their duty to prevent insolvent trading which is imposed by section 588G of the Corporations Act 2001.
The economic climate over the past two years has seen a growing number of corporate insolvencies. There is also evidence that directors, and particularly directors of small to medium size enterprises, do not fully understand their duty to prevent insolvent trading.
Every director of an Australian company is under a legal duty to prevent the company incurring a debt when the company is insolvent (or where that debt will cause the company to become insolvent).
The Australian Securities and Investments Commission's (ASIC) new Regulatory Guide sets out four key principles which directors should follow to meet their obligation to prevent insolvent trading.
The Regulatory Guide also sets out ASIC's approach to assessing whether a director has breached their duty.
Background
Section 588G of the Corporations Act 2001 (Cth) imposes a positive duty on directors of a company to prevent insolvent trading. Due to the economic downturn, the Australian Securities and Investments Commission (ASIC) believed the market, which includes directors and professional advisors, would benefit from clarification as to what factors ASIC considers prior to commencing an investigation into insolvent trading.
Important Features of this Judgment
- A Pt X Deed may create an equitable assignment of the rights, such that obligations continue after the Deed has come to an end.
- The Trustee of the Part X Deed of Arrangement can continue the proceedings initiated against One.Tel, despite the Deed coming to an end.
- Serves as a reminder that the enforceability of the debt does notaffect a debtor’s liability.
Facts
The Australian Securities and Investments Commission (ASIC) has released Regulatory Guide 217 (RG 217) to assist directors in understanding and complying with their duty to prevent insolvent trading under the Corporations Act 2001 (Cth) (the Act). It should be noted from the outset that ASIC regulatory guides indicate ASIC’s policy on specific issues, they do not have legislative force or constitute legal advice. Insolvent trading involves complex legal and accounting issues and it is therefore recommended that you seek professional advice to find out how the Act may apply to you.
On 14 September 2010, the Senate Economics References Committee (Committee) released a report recommending reforms to Australia’s current insolvency regime (Report) in the following key areas:
- the regulation of the insolvency regime
- the registration of insolvency practitioners, and
- the remuneration of insolvency practitioners.
Implications
If the recommendations contained in the Report are enacted in legislation, stakeholders may be affected in the following ways:
In response to a degree of uncertainty as to a director's statutory duty to prevent insolvent trading, the Australian Securities and Investments Commission (ASIC) has released a consultation paper containing a number of proposals on this fundamental duty (Consultation Paper 124: Duty to prevent insolvent trading: Guide for directors). Importantly for directors, the consultation paper (which contains a draft Regulatory Guide) identifies the factors ASIC considers when deciding to commence an investigation in relation to possible insolvent trading.