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.

The law of "shadow directors" means that a person who effectively controls a board of a company, even though that person is not a director, may find himself being legally classified as a director of the company. That carries with it the threat of legal liability for the company's insolvent trading debts in the event that the company goes into liquidation.

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.

The different types of insolvency

When a corporate tenant becomes insolvent, the landlord's rights depend upon the type of insolvency administration to which the tenant is subjected. Being familiar with the different options and the ways in which they are administered will enable property owners to act early and put themselves in the best possible position when faced with an insolvent (or potentially insolvent) tenant.

The three most common forms of insolvency administration which may affect corporate tenants are discussed below.

Under Austrian law the prevailing view and by and large unquestioned sentiment for decades had been that insolvency avoidance claims must be asserted by the administrator and cannot be assigned to a third party. Only in recent times a few scholars started to question this position. Now, in a very recent landmark ruling of 17 June 2019 (17 Ob 6/19k), the Austrian Supreme Court overruled the prevailing view and declared the assignment of avoidance claims by the administrator permissible. This is a game changer and will bring more flexibility and new dynamics in Austrian insolvencies.

With effect as per 1 July 2013, the Austrian legislator has enacted an amendment to the Limited Liability Companies Act (GesRÄG 2013) providing primarily for a de-crease of the minimum share capital to EUR 10,000, as well as a decrease of the formation costs. These changes are aimed at maintaining Austrian limited liability companies’ competitiveness in comparison to other European limited capital compa-nies and to fostering the formation of new limited liability companies also by small service providers.

On April 7, 2017, the Azerbaijani Parliament passed in the first reading a Draft Law “On Introducing Amendments to the Law "On Banks" (the “Draft Law”).

If a company becomes insolvent or experiences a liquidity crunch, which necessitates a restructuring or resort to higher-risk financing arrangements, the directors should consider whether to commence formal proceedings to facilitate the restructuring or financing.

From the public policy standpoint, there has been a shift towards more environmental stewardship in Canada, evidenced by heightened media attention on environmental issues and by an expanded legal framework relating to the management of environmental liabilities. For example, directors may be personally liable for violation of environmental statutes1 and may face reputational harm if the corporations they manage are found to have breached environmental rules or norms.