There must be some irony in the government asking the Productivity Commission, on the one hand, to inquire into “barriers to business dynamism”, one barrier offered by Commissioner Danielle Wood being undue risk aversion through complex and voluminous rules and regulations, and on the other hand, the government also asking the Commission to review various regulatory provisions – namely ss 588FGAA, FGAB, FGAC FGAD and FGAD of the Corporations Act, and ss 588GAA, GAB, GAC, GA, GAAA, down to HA, perhaps in some mock query as to whether those provisions have worked or not.
Views of Commissioner Wood on various aspects of Australia’s approach to risk include, one, to simply pass a law to stop or mitigate the risk and two, to add new law but not subtract the old.
She refers to the Commission’s “barriers to business dynamism” inquiry, trying to find out where and how that inclination might be evident: Australian Productivity – Murrays Legal
The sections
It is too much for me to accurately explain ss 588FGAA, FGAB, FGAC FGAD and FGAE of the Corporations Act, being rights of administrative recovery for liquidators through ASIC, comparable but drafted completely differently from the rights of administrative recovery for trustees through AFSA, being ss 139ZQ, ZR, ZS and ZT of the Bankruptcy Act; and to explain ss 588GAA, GAB, GAC, being creditor defeating dispositions, and s 588GA, GAAA, GAAB, GAAC, GB (safe harbour), and 588H, and s 588HA.
This would divert my attention from more productive tasks.
Suffice to explain as to one category, that Australia’s response to what was seen as an overly strict insolvent trading law, s 588G, was not to ameliorate its terms – that would have been too risky. Rather a safe harbour exception to it was created, in 2017. The radical idea of reducing rather than adding to was rejected.
Past reviews by Murrays Legal
Looking back over my numerous comments, this following analysis and references cited might provide some insights, Maybe we should just repeal s 588G – insolvent trading? – Murrays Legal.
To repeat some points that I made.
- The law of insolvent trading aims to deter proscribed conduct by directors and incentivise their early proactive steps; and in default, to provide creditors with some recompense for their losses. It probably achieves neither of these aims in most cases.
- As to its deterrent impact, s 588G hardly fits the required features of prompt detention and enforcement – see my “The empty threat of insolvent trading” (2009) 9(8) INSLB 162; and its impact on SMEs would be negligible – Treasury Safe Harbour Review, 2021.
- As to s 588G’s default remedy of recompense, we know little, that is, to what extent s 588G or any litigation claims, even where ‘successful’, produce any return to creditors once the costs of the litigation process are taken into account. Without this, we have been “legislating in the dark”: Shedding light on the dark side of insolvency practice – Murrays Legal. There has been nothing from the industry, for example as to the data supporting or otherwise the extent of insolvent trading financial outcomes.
- As to two studies at least, back in 2015, in a comparative review of Australia with the UK’s section 214 Insolvency Act, the author concluded by saying that “what is remarkable is that the Australian remedy appears to have been no more effective over its near 50 year history than s.214 has been in its 27 years.[11] In fact, according to that author, the problem of insolvent trading is over-stated, at least in the UK.
- And as to recoverability of sums ordered to be paid, another study showed many directors adopted bankruptcy, a s 588G claim being a provable debt.[12] The significant proportion of matters that proceed by way of default or undefended judgment in Australia suggest a lack of interest by directors in the outcome.
- In my Does insolvent trading work? The UK may not think so. – Murrays Legal, I review Australian, Singaporean and UK law
- While I say that creditors should be able to look after their own interests more, this is unrealistic given business records are opaque, with no access to director IDs, no free access to ASIC records (that would be too risky), no beneficial ownership register, and more. It is not reasonable to expect creditors to themselves regulate insolvent trading.
- In that respect, respected academics Lynne Taylor and Sulette Lombard refer to the “eco-systems” in which the existing laws operate – a high proportion of SME companies, with limited assets and funding available and a low value of directors’ personal assets. Whatever insolvent trading laws exist, these contexts are often insurmountable, at least under the current system.
- I have expressed it that our opaque business environment in effect presents several other ‘opportunities’ for undetected breaches of the law – including a. the ability for businesses to trade through complex unregistered trust structures; b. the legislative support, by default, of allowing reliance for cash flow on unremitted tax withholdings; and c. the complexity of corporate insolvency law and tax law, and their intersection, generally. Just as dim or no street lighting may facilitate crime: See Helen Anderson, ‘Sunlight as the Disinfectant for Phoenix Activity’ (2016) 34 Company and Securities Law Journal 257.
- The UK government has seen its wrongful trading conduct as constituting a ‘market failure’ in relationships between corporations and their creditors, evidenced by creditors’ inability to effectively manage the risks created by limited liability.
- I cite cases where insolvent trading went on for years before liquidation.
NZ review
A review of directors’ duties was commenced in August 2025 by the NZ Law Commission. It is focusing on two main areas, one, directors’ core duties and liabilities under the NZ Companies Act 1993 and whether directors’ duties and liabilities under other legislation can be approached in a more consistent and principled manner in future legislative reform. The Commission is to consult publicly in 2026 and it aims to complete its final report in 2027.
Importantly, a focus is to be given to transparency of business dealings, through director IDs and such, making it easier to identify all the companies with which a director is associated. The Supreme Court decision in Mainzeal is also to be considered: NZ Supreme Court confirms Mainzeal directors’ liabilities for over NZ$39 million – Murrays Legal
Taylor and Lombard conclude that when examined from that director duties perspective, law reform consideration might preferably be given to abandoning the NZ insolvent and reckless trading duties so that directors’ decision making when a company is in financial distress is assessed according to whether it meets the standard required by directors’ duty of care, skill and diligence.
At least such a change may be equally as ineffective as s 588G.
On a positive note
In any event, irrespective of government attention or delay, AI will transform this problem: What is the future of insolvency practice? – Murrays Legal
