ASIC warns boards to declare insolvency before it’s too late

Experts say company boards may place their businesses into voluntary administration earlier than expected, after ASIC declared it will ramp up investigations of businesses that are at risk of trading while insolvent.

Experts say company boards may place their businesses into voluntary administration earlier than expected, after ASIC declared it will ramp up investigations of businesses that are at risk of trading while insolvent.

New Australian Securities and Investments Commission chief Michael Dwyer says the regulator will try to step up efforts to make sure company directors will take necessary action to prevent companies trading while insolvent.

“ASIC has a very effective program of identifying potentially insolvent companies and makes inquiries very early on, and hopefully can assist companies before the directors get into a position where they are breaching their duties,” he told The Australian Financial Review.

But because insolvency is often difficult to recognise, experts say the move may prompt more boards to introduce administrators earlier than expected to avoid the consequences. If a firm is found to be trading while insolvent, company directors may be held personally liable and face legal action.

Jim Downey, principal of JP Downey & Co, an accounting firm specialising in insolvency and business reconstruction, says ASIC’s warning could lead to more companies declaring insolvency before they otherwise would have.

“I applaud ASIC’s move there; I think it’s desirable because too often we’re seeing companies going and crawling for assistance long after they should have been declared insolvent,” he says.

“Boards need to be getting on to it as quickly as possible… It would be nice to see the patient when he still has a pulse.”

But Chris Palmer, senior partner at accounting and insolvency firm O’Brien Palmer, warns that boards shouldn’t be too hasty to hire administrators before the time is right.

“Boards have to take into account any number of factors, and it’s not always easy to determine that. While directors should be conscious of their duties, they should not act recklessly, because the appointment of a voluntary administrator could damage their business.

“They should weigh up all the factors and take an objective, considered choice to see whether they should make a move.”

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