Australia's insolvent trading laws could result in more company collapses than necessary, according to McCullough Robertson partner Scott Butler.
Butler said the laws prevent company directors restructuring in the GFC as directors look to avoid the liability of insolvent trading, rather than trade their way out of business difficulties.
"The Corporations Act 2001 makes directors responsible for ensuring their companies do not trade while insolvent, and leaves them open to civil, and possibly criminal, penalties as well as being personally liable to compensate for losses if insolvent trading occurs," he said.
"This legislation means that directors are walking a legal tightrope if they attempt to keep their businesses afloat rather than declaring insolvency."
A director cannot allow a company to incur a debt unless he or she has a reasonably held expectation that it is solvent under current legislation.
However, with finance difficult to access and cash flow affected by creditors delaying payment, the issue is affecting a growing number of otherwise creditworthy companies, said Butler.
Australian regulators need to provide greater flexibility to directors, he said, such as that granted in Britain where directors have a greater opportunity to continue trading if there is a reasonable prospect of avoiding insolvency. Germany suspended insolvent trading laws in 2008 in response to the GFC.
- Sarah Sharples
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