Insolvent trading is one of the many items for review recommended by the Parliamentary Joint Committee report on Corporate Insolvency. ASIC is updating its guidance on the current law, including safe harbour, but larger issues, including international comparisons, need to be examined.
ASIC has released Consultation Paper 372 – Guidance on insolvent trading safe harbour provisions: Update to RG 217 – seeking feedback on its proposed updates to Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors (RG 217).
CP 372 is seeking feedback on ASIC’s proposed approach to guidance on holding company liability, safe harbour, and key principles directors should consider in carrying out their duty to prevent insolvent trading.
Comments closed on 26 October 2023.
Background
Some background is that the safe harbour provisions contained in sections 588GA and 588GB of the Corporations Act were reviewed in 2021 and a report tabled in parliament on 24 March 2022. The Report identified a lack of awareness and understanding by directors and their advisers of the insolvent trading and safe harbour provisions and one suggestion was that ASIC update RG 217. Review of the insolvent trading safe harbour – Final report | Treasury.gov.au
Separately, the PJC Report of July 2023[1] examined the insolvent trading laws and recommended they be further examined in a proposed more comprehensive review. The Committee heard that the prevalence of directors “trading on their companies and incurring debt long past the point a business was viable should be ‘front and centre’ in any comprehensive review, given the damage it inflict[s] on creditors, the economy, and directors themselves”.
The PJC ultimately agreed that the current insolvent trading regime is not working effectively with the evidence suggesting that likely causes include weaknesses in the legislative provisions and lack of enforcement by ASIC, or, it might be said, by liquidators.[2]
Comparisons
The Committee did not refer to either New Zealand, Singapore or UK law, which, among others, would need to be examined in any comprehensive review. Some of the reports there are not positive: Does insolvent trading work? The UK may not think so. – Murrays Legal. A review in New Zealand[2] found that while there were higher ‘success’ rates for liquidators, there were more uncontested cases with the majority of companies being in the SME sector. See for example Ji v Ding [2023] NZHC 2730 (29 September 2023) (nzlii.org). As the author says,
‘even where SME directors are aware of their responsibilities, the threat and/or reality of enforcement action may be of little consequence for some … [they may have] already lost everything’.[3]
In the UK, in light of what was seen as too little action taken by liquidators, the secretary of state was given powers to both disqualify and seek compensation from directors. The second only such case was one of
‘woefully reckless and incompetent conduct on the part of a sole director of a company operating in … a highly regulated framework’ which conduct ‘put customers’ money at significant risk’: Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd) (Rev1) [2023] EWHC 2284 (Ch) (20 September 2023) (bailii.org).
In a 2015 comparative review of Australia with the UK’s 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”.[4]
According to that author, the problem of insolvent trading is over-stated, at least in the UK.
Australia’s approach of having a harsh insolvent trading law and then an ameliorative safe harbour, added to during COVID – see section 588GAAA – might need to be reassessed. When considering its own COVID-19 reforms, NZ decided it did not need an equivalent protection to Australia’s s 588GAAA because Australian law imposed an
“insolvency-related duty, which is much more strict than the two New Zealand creditor protection duties. Unlike in Australia, there is no specific duty on New Zealand directors to not allow a company to trade while insolvent. The duties in New Zealand are principles-based and provide scope for directors to exercise judgment”: see Duties of directors of insolvent companies – New Zealand Supreme Court decision – Murrays Legal
Context of a comprehensive review
The PJC also heard that we need to ask some basic questions about insolvency law – what are the goals? what are we trying to achieve? – which can and should be applied to insolvent trading laws.
Without overthinking this, a basic purpose of 588G is to caution or deter directors from allowing their companies incurring unrepayable debt by way of the threat of personal liability; and if that does not work in a particular case, to recompense creditors for the consequent losses. Whether either purpose is generally achieved is problematic, and whether other options might be better is open.
Also, insolvent trading in Australia has to be seen in the opaque commercial environment in which it occurs, presenting several ‘opportunities’ for undetected breaches of the law:
- the ability for businesses to trade through complex unregistered trust structures;
- the lack (for creditors) of open access to Director IDs or ASIC searches;
- the legislative support, by default, of allowing reliance for cash flow on unremitted tax withholdings, with single touch payroll restricted from requiring reporting and payment [5]; and
- the complexity of corporate insolvency law and tax law generally.
Reform of insolvent trading law without attending to these perverse incentives for directors may not be effective.
ASIC’s RG 217 is some attempt to instill some corporate law values against many competing pressures.
See generally: Search Results for “588g” – Murrays Legal
PS: A legal and technical comment is that ASIC should cite court decisions in its guidance using medium neutral citations, to ensure public accessibility, not citations of private publishers, with whom one must subscribe for access.
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[1] Corporate insolvency in Australia – Parliament of Australia (aph.gov.au)
[2] See also Associate Professor Mark Wellard, Insolvent Trading: Director Accountability for Minimal Returns to Creditors in Liquidations (2023) 31 Insolv LJ 85.
[3] Directors’ Duties on Insolvency in New Zealand: An Empirical Study (2018) 28 New Zealand Universities Law Review 171, Lynne Taylor.
[4] R Williams What Can we Expect to Gain from Reforming the Insolvent Trading Remedy? (2015) 78 Modern Law Review 55.
[5] See Budget Savings (Omnibus) Bill 2016
