Federal Government Reforms for Insolvent Trading Sparks Business Activity
Welcome to 2016 from all of us here at Jenkins Legal Services. As the New Year begins, so too does the JLS Blog in what should turn out to be anything but a quiet year for business and commercial reform.
In line with its new objective of encouraging innovation and confidence into the Australian economy, the Federal Government announced in late December 2015 an introductory proposal for a ‘safe harbour’ from personal liability for directors engaged in insolvent trading as part of its National Innovation and Science Agenda.
The proposal is not as unprecedented as it may seem. Australia’s insolvent trading laws are significantly stricter than major trading partners such as the United Kingdom, Canada and New Zealand, with the United States having no insolvent trading laws whatsoever. The consequences of breaching Australia’s insolvent trading laws under the current legislation is widely accepted in the business community as creating a significant barrier to innovation and global commercial interaction.
The key issue the Federal Government will be attempting to strike a balance between is the view, on one hand, that directors are too quick to appoint administrators or liquidators to protect themselves from personal liability, and conversely that insolvent trading laws are often regarded as not having their intended effect of actually preventing insolvent trading, as directors with their personal wealth tied to companies are often seen as continuing to trade to try and save their investments.
Proposals for ‘safe harbour’ reforms have been in discussion by Government and industry groups since 2007. The proposal announced in December 2015 will protect directors from personal liability for insolvent trading on the condition that they appoint a ‘restructuring advisor’ to develop a turnaround plan for the company. A possible mechanism to give effect to the ‘safe harbour’ is a ‘business judgment rule’ which dictates that a director has not breached their duties to the company if they discharge their duties of good faith and inform themselves about the subject matter of the judgment, rationally believing the judgment is in the best interests of the company.
Industry Groups (such as the Australian Restructuring Insolvency & Turnabout Association [ARITA]) have recommended to the Productivity Commission that they also add the following criteria:
That the director has taken all proper steps to ensure the financial information for the restructuring advice is accurate;
That the director was informed with restructuring advice from an appropriately qualified professional.
That it was the director’s business judgment that the interests of the company’s creditors were best served by the restructuring, and
That the director took all reasonable steps to ensure that the company pursued the restructuring.
A legislative proposal paper will be released in the first half of 2016. Legislation is expected to be introduced and passed in mid-2017.
For more information:
Innovation Statement regarding Insolvency: http://www.innovation.gov.au/page/insolvency-laws-reform
The full Productivity Commission Report can be found at: http://www.pc.gov.au/inquiries/completed/business/report