Directors disappointed at no change to Australia's insolvent trading laws

At the beginning of 2010, the Australian Goverment announced a Corporate Insolvency Law Reform Package. The package included options for reform of insolvent trading laws, which had the potential to reduce directors' liability for insolvent trading while directors were trying to restructure financially troubled companies.

The proposals for reform, which would reportedly put Australia on a more equal footing with other countries, included the introduction of a business judgment rule defence to directors' liability for insolvent trading and a moratorium from the duty not to trade while insolvent. The proposals were welcomed by businesses for encouraging directors to save distressed companies, and to provide protections to allow them to do what is best in the interests of shareholders and other stakeholders.

It was recently announced that the Government had abandoned the proposed reforms, for the published reason that insufficient evidence had been provided that law reform would save more companies. It was reported that the Australian Institute of Company Directors and the Insolvency Practitioners Association were among those disappointed at the news.

Some legal commentators assert that there is much evidence to support the view that the risk of liability for insolvent trading forces directors to put companies into premature administration. Business groups are reported to be of the opinion that directors often err on the side of caution and appoint administrators rather than run the risk of serious consequences of continuing with trading.

We will report on any further developments as they may arise.