Changing director liability laws for insolvent trading won’t reduce the number of company collapses: Government

A push to remove company directors from personal liability for debts incurred by a company while insolvent has not succeeded.

Parliamentary Secretary with responsibility for corporate law David Bradbury is understood to believe that there hasn’t been enough evidence to show that changing the laws would help companies to work themselves out of insolvency. Bradbury also believes that changing insolvent trading laws could have an impact on the cost of capital.

The Australian Institute of Company Directors, which has argued that existing laws increase the attractiveness of pushing companies into liquidation, was contacted for comment this morning, but did not respond before publication.

A paper released early last year by the government discussed the prospect of a moratorium from sanctions on trading while insolvent during workouts.

But Jim Downey of insolvency specialists J P Downey & Co said he did not expect Bradbury’s views to greatly change the level of litigation for ths issue, which is relatively low and dominated by larger companies.

“If one examines how many actual cases have got to judgement on the question of insolvent trading I think you’ll observe that they are relatively few in number,” Downey says.

“In the SME sector your average director is so committed personally for guarantees to banks and other finance companies – and in some cases trade creditors – it makes a very poor defendant for a liquidator to take aim.

“The liquidator is faced with a complex task in a superior court at great expense and if he doesn’t have the confidence that any judgement would ultimately be met with a payment the appetite is not there.”

Downey says for larger companies insurance coverage for directors can be of appeal to liquidators, so in large corporate collapses you see instances of liquidators chasing claims against directors.

“The business community is well aware of provisions of insolvent trading and it is there to act as a deterent to directors and to encourage them to seek early professional advice. I think by and large it is filling that function,” Downey says.

Earlier this year the AICD noted that directors were coming under more scrutiny in light of the volatile economic conditions.

“Where directors are fulfilling their duties diligently and ethically however they should be entitled to greater certainty of their legal position or liability exposure,” AICD chief executive John Colvin said in April.