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Director’s defence for insolvent trading proposed

Director’s defence for insolvent trading proposed

A new defence proposed could allow directors to restructure an insolvent company.The Law Council of Australia's (LCA) proposal has been met with support from insolvency specialists such as Scott…

A new defence proposed could allow directors to restructure an insolvent company.

The Law Council of Australia's (LCA) proposal has been met with support from insolvency specialists such as Scott Butler, partner at McCullough Robertson.

In a letter to the Federal Minister for Financial Services Chris Bowen, the LCA has appealed for a defence to be introduced that permits director to restructure an insolvent company - provided appropriate advice based on accurate accounts has been obtained to form an honest business judgement.

But the Australian Council of Trade Unions (ACTU) suggested on Tuesday that company directors should face tougher penalties if firms go bust without sufficient provision for their employees, citing statistics that 5000 workers each week were forecast to lose their jobs over the next 12 months.

Butler said that adopting such a hard-line position could be problematic.

"If companies are forced to set aside sufficient money at all times, to meet all accrued employee entitlements, then they are not going to be able to use that money as working capital and that will severely affect their ability to trade, their ability to expand, to buy plants and equipment and essentially their ability to employee more people," he said.

Butler said the majority of directors who trade whilst insolvent are those in small to medium companies who don't generally obtain appropriate advice.

"Or if they do obtain some advice it's generally not based on accurate accounts, because they just don't keep their house in order, so this new defence won't assist them," he said.

"The new defence is really aimed at public companies and large private companies whose directors, in my experience, take their insolvent trading responsibility seriously.

"They take proper advice before undertaking any course of action and I think this new business judgment defence would maintain the objectives of the current law which is to prevent people trading whilst insolvent but at the same time, without impeding honest efforts of restructuring, based on professional advice."

According to the LCA, when restructuring is available it produces a superior outcome for all stakeholders - the business can continue to trade without the risk that commercial contracts will be cancelled, sale of the business is avoided, employees redundancies are minimized and ordinary creditors continue to be paid in full.

Butler said he would also support the introduction of a defence based on the UK model, where directors are held personally liable if there was no reasonable prospect of avoiding insolvent liquidation and they don't minimise the potential loss to the company's creditors.

"That sort of law places a focus on the outcome at the end of the day, rather than our law which currently places the focus on the company's current solvency," he said.

"There has been some criticism though of the UK model ... that it's too easy, potentially, for directors to avoid liability by showing that there was some reasonable prospect of the company avoiding insolvent liquidation at the end of the day. So that's why I think this new defence suggested by the Law Council is a good compromise."

- Sarah Sharples

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