We welcome insolvency law reforms
Tue 19 January 2010
We welcome insolvency law reforms
Media & Communications: Media Release
The package of insolvency law reforms announced by the Minister for Corporate Law, Chris Bowen, addresses some significant concerns of business and the director community, the Australian Institute of Company Directors said today.
We welcome the measures, which included amendments to the Corporations Act which would reverse the effects of the High Court’s decision in the Sons of Gwalia case and a series of options for reform of the insolvency laws where directors are seeking to restructure companies outside formal external administration.
“The Federal Government’s decision to reverse the effect of the decision in the Sons of Gwalia case is a sensible and important one,” said John Colvin, Chief Executive Officer of Australian Institute of Company Directors.
“It will create certainty and address some adverse consequences flowing from that decision, both for the cost and availability of credit to Australian business and for the cost and complexity of external insolvency administration.
“The High Court decision had the effect of ranking shareholders equally with unsecured creditors. This drove up the cost of credit for business. It created major practical problems for insolvency administrations, meant added delays and costs and reduced the pool of assets available to ordinary creditors.
“It also gave litigation funders added impetus to bring class actions against insolvent companies.
“This move by the Government restores the long-standing principle that lenders to companies rank ahead of the owners of companies.”
We also welcomed the release by Minister Bowen of a discussion paper canvassing options for improvements to the operation of Australia’s insolvency laws to provide a ‘safe harbour’ for directors who are attempting to reorganise companies outside formal external administration.
We also note the ASIC consultation paper 124, titled Duty to prevent insolvent trading: Guide for directors, which proposes some practical assistance. AICD has made a submission to ASIC and believes these two initiatives should inform one another.
“In particular, the option to allow the application of a modified Business Judgement Rule under section 180 of the Corporations Act, in respect of a director’s duty to avoid insolvent trading while attempting to restructure a company without resorting to external administration, appears to be a good step forward and could address many of the problems created by the current insolvency laws,” Mr Colvin said.
“AICD has long been concerned that the personal liability of directors for insolvent trading under the current law has discouraged attempts to rescue businesses which might otherwise have been saved.
“Allowing companies that might have survived to go into administration without the directors being properly empowered to salvage the company has often been to the ultimate disadvantage of shareholders, creditors and employees.
“The modified Business Judgement Rule being proposed would help avoid that situation.
“However, the Government could go further in this area.
“AICD strongly believes there is a need more generally for a broad-based Business Judgement Rule defence, or safe harbour, for directors, consistent across Commonwealth, state and territory laws. The defence would be available when directors make commercial decisions in good faith, having informed themselves about the subject matter and having acted in the best interests of the company.
“This Business Judgement Rule could apply more generally in the area of insolvency, not just in the case of work-outs.”
The Australian Institute of Company Directors will also examine closely the proposed option in the discussion paper of allowing directors to invoke a moratorium from the duty not to trade while insolvent, for a limited period and subject to termination by creditors, as work-outs are attempted.
We will be lodging a submission on the discussion paper as part of the consultation process announced by the Minister.
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Media Contacts:
Steve Burrell , General Manager Communications and Public Affairs, (02) 8248 6627 or
0407 708 485
Juliet Chandler , Communications Advisor, (02) 8248 6624 or 0412 580 402
Australian Institute of Company Directors (AICD) provides education, information and advocacy for company directors Australia wide, with offices in each state to cater for 25,000 members. AICD members work in diverse corporations such as small-to-medium enterprises, the ASX Top 200 corporations, public sector organisations, not-for-profit companies, large private companies and smaller private family concerns.