- Federal Parliament recently passed a new defence for company directors for insolvent trading.
- The reforms are intended to drive cultural change among company directors by promoting a restructuring culture.
- Many practitioners will receive requests for advice about the impact of these major reforms in the coming months.
Australia’s insolvent trading laws impose a duty on company directors to prevent the company from trading while insolvent. Under s 588G of the Corporations Act 2001 (Cth) (‘the Act’), a company director may be personally liable for debts incurred by the company if, at the time the debt is incurred, there are reasonable grounds to suspect that the company is insolvent. The focus of this provision is on the timing of when debts are incurred by a company, rather than the conduct of the director in incurring that debt. This focus can, lead
to undesirable outcomes, including that directors may:
- prematurely appoint an administrator or liquidator, with the potential for unnecessary destruction of enterprise value;
- focus on their personal liability, rather than exploring ways to improve the financial circumstances of the company; and
- be deterred from taking up directorships in higher risk start-ups on account of the heightened risk of personal liability.
The undesirable outcomes are not in the interests of companies, their directors, employees, creditors or the economy as a whole.