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Insolvent trading – Changes on the horizon?

01 Jul 2009

Insolvent trading laws have been in force in the Corporations Act in their current form since 1993. In recent times, after some high profile corporate failures, a concerted push has been made in some quarters to water down the insolvent trading regime and provide directors with either a ‘safe harbour’ or additional defence.

Currently, a director of a company which is or becomes insolvent can be liable for debts the company incurs. Directors do have defences to such a claim including that they could not reasonably have known that the company was insolvent or that they acted on the information provided by a responsible person (eg accountant).

The introduction of such liabilities has helped ensure that corporate activities take into account the interests of creditors.

The current global financial situation has helped focus attention upon the insolvent trading regime and directors’ duties. After cases such as Babcock & Brown, HIH and OneTel, some directors assert that but for the insolvent trading regime, there is currently a push to extend defences to include a defence that the director would not be liable if they obtained appropriate restructuring advice on the basis of accurate accounts whether the interests of the company and its creditors are best served by pursuing restructuring options taken. In other words, some assert that but for the insolvent trading liability, they would have been able to save the companies.

For these purposes, we will put aside the insolvent nature of such companies and whether such a defence would have even been open. Nonetheless, Corporate Australia is familiar with the regime and generally, those involved in larger enterprises do take appropriate advice when there are indicators of insolvency. This is shown by the fact that insolvent trading claims are the exception and not the norm. In Queensland alone, there are only about three reported cases on the topic.

Anecdotally, most insolvencies where insolvent trading is clear appear in smaller enterprises where the attention to accounts and knowledge of corporate responsibilities is often lacking. Most larger enterprises, with appropriate financial structures and information know when cash flow is tight and when there are difficulties looming on the horizon.

Whether a new defence is implemented or not, it is vital that when there are any concerns about insolvency of a company, that directors take appropriate accounting and legal advice (preferably external) and closely monitor the situation.