Far-reaching recommendations on some areas of Australia’s insolvency and restructuring law could be introduced into Australia’s law. One of those proposed changes centres on the liability of a company director when a business becomes insolvent. Proposed changes would make it easier for directors to continue to trade, despite an imminent insolvency in one of their companies.
Melbourne-based Ian Walker, is a partner at Minter Ellison and one of Australia’s leading insolvency and restructuring specialists. He insists that change could potentially prevent so many Australian companies going in to administration far too soon. As a result many more in the future could probably weather their current storm and survive.
He said: “There is a recognition in Australia that protection of companies facing insolvency is something that needs to be better managed, particularly where there is scope for a restructure of the business that might preserve value not just for creditors but also for shareholders.”
And he should know, having worked in security enforcement in Australia for more than three decades now. His career involved his representing a wealth of private and public sector clients but his specialism – and main interest – was always within the financial services industry.
Walker’s role is to advise insolvency appointees such as liquidators, receivers, administrators et al on creditors rights, duties and powers etc when it comes to winding up a business. He also advises third parties, including company directors, who are involved in an imminent insolvency issue.
Liability of company directors for insolvency
According to Walker a company looking as if it may be faced with insolvency is usually prevented from being bombarded with demands from its secured and senior creditors if it agrees to pay back a certain amount of debt and put together a restructure plan. If the arrangement is good then the senior and secured debt usually doesn’t need to be repaid until the restructuring is completed. However, smaller creditors need to be paid in order for the company to remain solvent.
It’s the company directors’ responsibility to ensure the company remains solvent. In the event it continues to trade but is insolvent then the directors will be personally liable for debts incurred during that time if the company goes in to liquidation. Understandably many company directors don’t want huge personal debt hanging over them so, instead of opting for restructuring, they put the company into a formal insolvency administration instead. This has long been a gripe from The Australian Institute of Company Directors who have campaigned for some time for a change in the law.
Walker added: “The circumstances in which company directors can face personal liabilities creates tension in Australian insolvency markets and often can lead to the early appointment of an administrator.
“Because of the lack of protection against the consequences of insolvent events of default under contracts the appointment of an administrator can lead to a substantial loss in value of the company’s assets. However if the company for instance is supplying services under some sort of contract and that contract has an ipso facto clause based on insolvency and that occurs then that contract can be terminated by the other party so that the provision of services will no longer be available and also there will be a loss of revenue and value for the company.”
Productivity Commission Recommendations
In May the Australian Productivity Commission (the Australian Government’s independent research and advisory body) produced a draft report Business Set Up, Transfer and Closure which came with a number of recommendations to help companies from going into insolvency too soon. One of these was that the Corporations Act was amended to mitigate a company director’s personal liability when it comes to insolvent trading.
This would take the form of a ‘safe harbour’ period for company directors prior to the company going into voluntary administration. During this period the director would appoint an independent adviser.
Said Walker: “To achieve this it would be necessary for directors to receive independent advice from registered advisers in the insolvency space. The company would also have to inform Australia’s corporate regulator Securities Investment Commission (ASIC) and/or ASX in the case of listed companies of the appointment of an advisor.
“In informing themselves and the advisor and determining whether to act on any restructuring advice, directors would be under the duty to exercise their business judgement in the best interests of the company’s creditors as a whole as well as the company’s members.
“That is consistent with Australian law on the duties of directors when the company is approaching insolvency. If those thresholds are met and satisfied then the directors’ duty not to trade while insolvent would be satisfied during the period of the advice and the steps relating to implementing the restructuring advice.
According to the Productivity Commission there were 103 cases of companies trading when insolvent between the years of 1961 and 2004 (when the liability law was introduced). In 75% of cases the court ordered compensation to be paid.
Insolvency Law Reform Bill 2014
Meanwhile, creditors involved in an insolvency situation will be given more powers in the future with the introduction of Australia’s Insolvency Law Reform Bill (ILRB) in December last year.
That’s because it gives the ASIC has more powers over registered liquidators to the extent it can suspect or even cancel their formal registration. Walker adds: “Greater control is given to creditors regarding the liquidator’s position or that of the insolvency administrator. Creditors will be entitled to require an insolvency administrator to convene a creditors’ meeting at which creditors have the power to remove the insolvency administrator or the liquidator and appoint another one.
“This is likely to substantially impact on a number of insolvencies where creditors are dissatisfied with the conduct of an administrator.”
Neither the ILRB or the Productivity Commission’s recommendations have yet come to pass but many working within the finance sector hope they won’t have too long to wait for this joint defibrillator action for Australian companies.