The status quo on the business judgement rule in insolvent trading can’t be maintained, according to a league of lawyers. Karen O’Flynn, national coordinator of Clayton Utz’s restructuring and insolvency practice, writes.
Less than 10 years ago, a Supreme Court judge held that insolvent trading liabilities should be relaxed for wives who are directors of family companies. That notion was firmly quashed by the NSW Court of Appeal, which held that it would reinforce gender stereotypes and undermine "the confidence with which potential creditors will deal with small companies in which women participate with their husbands".
Indicative of just how far we've come since then was the recent panel discussion on current issues in insolvent trading hosted by Clayton Utz's national women lawyers network, Momentum and Women on Boards.
The discussion was focussed on the hot button topic of the improvement of directors' statutory defences to insolvent trading liabilities.
The audience of Sydney based board members and business leaders heard a wide range of professional perspectives on the Government's current proposal to introduce a safe harbour defence. The panel was chaired by Clayton Utz's National head of Restructuring and Insolvency Karen O'Flynn and included industry specialist, Janna Robertson from Korda Mentha, Australian Institute of Company Directors' Legal Counsel and Senior Policy Adviser, Gabrielle Upton, and Clayton Utz corporate partner, David Landy.
Interestingly, despite the diversity of the Panel and the audience, there was broad agreement that, of the three options put up by the Government, only one was worth pursuing.
Evidence of the inhibiting effect that fear of insolvent trading liabilities can have on board decision-making processes made it abundantly clear that maintenance of the status quo was simply not supportable. At the other end of the spectrum, the government's suggestion that directors should simply be able to invoke a unilateral debt moratorium was impractical and might, in some extreme cases, even encourage phoenix company activities.
David Landy says the preferred option was the internal management/external advice model. Under that proposal, directors could pursue a debt restructuring plan without being liable for fresh debts, provided that they had taken professional advice.
Landy says that although there was general support for this model, it was emphasised that the devil will be in the details. He says directors were particularly concerned that we should not end up with a statutory defence that simply set the bar too high to be of any practical use.
At the same time, he acknowledges it was recognised that, in those situations where directors have clearly breached their duties, the law could improve the ability of liquidators to bring recovery proceedings. Korda Mentha's Janna Robertson made a strong case for a simplified process to quantify the amount of loss for which errant directors should be liable.
The event was not just about providing expert opinion on the proposed changes to the business judgement rule but was also a useful networking tool for Sydney business women. Momentum aims to create an environment that maximises the opportunities for women to succeed through active engagement.