The Federal Government has called for submissions by 2 March
2010 on its proposals for reform of the current insolvent trading
laws. While it is early days and the reforms are far from
finalised, the discussion paper, Insolvent Trading: A safe harbour
for reorganisation outside of external administration confirms that
promoting options for corporate rescue outside of external
administration is on the Federal Government's agenda.
The Government wishes to explore three options:
The first option is to maintain the status quo. Despite
acknowledging that the current insolvent trading regime may
discourage directors from pursuing opportunities for an informal
work-out, the current law also discourages overly risky behaviour
by directors and encourages companies that are concerned about
solvency to attempt reorganisation under external administration
where the process is more tightly regulated.
Business judgment rule for insolvent trading
This option seeks to introduce a form of relief for directors
who discharge their duties of due care and diligence in seeking a
work-out, but in doing so breach the duty not to trade while
The proposed rule would be satisfied if:
the financial accounts and records of the company presented a
true and fair picture of the company's financial circumstances
at the time that the rule was invoked
the director was informed by restructuring advice from an
appropriately experienced and qualified professional with access to
the accounts and records about the feasibility of and means for
ensuring that the company remains solvent or that it is returned to
a state of solvency within a reasonable period of time
it was the director's business judgment that the interests
of the company's body of creditors as a whole, as well as
members, were best served by pursuing restructuring
the restructuring was diligently pursued by the director.
This proposal places a great deal of responsibility and
discretion in the hands of the directors as well as the insolvency
practitioner advising on the restructuring options. The potential
for abuse as well as the uncertainty in application heavily impacts
on this kind of reform.
Option 3 involves invoking a moratorium on the prohibition
against insolvent trading while an informal work-out is attempted.
The moratorium would require the company to inform the market that
the company was insolvent (and that it was seeking to implement a
work-out and avoid external administration). In addition, time
limits, extensions and termination of the moratorium would be in
the hands of the creditors as opposed to being completely
controlled by directors.
While in theory the moratorium is an attractive option, there is
some doubt about the level of regulation and monitoring required in
order to make the moratorium a "safe harbour" for
directors. There must also be some consideration about whether a
moratorium in the form currently proposed will present any real
alternative to voluntary administration, for example, it is likely
that financiers and creditors will include entering into the
moratorium as an additional event of default under various
Given that the proposals are only at the stage of calling for
submissions there is some way to go before any reform will have any
force. However, the proposals do require attention from financiers
and creditors to ensure that the risks of the proposed reforms are
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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