Corporate insolvency: restructuring the financial sector and understanding the long terms effects of the GFC

Presentation by Justice Berna Collier, Part-time Commissioner of the ALRC, to the Australian Women Lawyers Conference, Stamford Plaza Brisbane, 7 August 2010

The world of finance does not stand still. For those of us in the law, where developments occur at a more structured (dare I say, sedate?) pace, the roller-coaster ride of the Global Financial Crisis has been almost baffling in its enormity and complexity. Indeed between the time I was asked to write this paper (mid March 2010) and the time I wrote it (early July 2010):

  • The term global financial crisis or “GFC” became almost passé, the world having entered a period of global sovereign debt crisis (“GSC”) kicked off by the unfolding of the Greek debt crisis in the first quarter of this year and subsequent concerns about Portugal, Ireland, Italy and Spain.
  • The focus of primary concern had moved from the US and GFC landmarks like the collapse of Lehman Brothers in September 2008, to Europe.
  • Wholesale funding markets have further fractured in the wake of the European debt crisis.
  • The Australian dollar reached the 90 cents plus range but then fell back to the low 80’s, before climbing again to the high 80’s (and then back to the low 80’s).
  • International stockmarkets, which had staged a significant recovery since 2008, had once again dipped substantially (and risen, and then dipped).

The economic conditions have been described as the toughest economic conditions the federal government has faced in 75 years. Suggestions at the beginning of this year (and as late as 1 May 2010) that the global economy was recovering, like rumours of Mark Twain’s death, appear greatly exaggerated.

At the risk of being pessimistic, I wonder how the economic landscape will have further transformed by the time this paper is presented.

Governments around the world have sought to respond to the crisis in multiple ways, fiscal and legislative. The GFC has seen its share of corporate collapses in Australia, possibly the most infamous being that of Storm Financial Group, the collapse of which was apparently directly related to the stock market crash of 2008. Today I am presenting an overview of the responses of the Australian government in the form of reforms (or proposed reforms) to Australia’s corporate insolvency framework. For the purpose of this presentation I will assume that everyone in the room has a general understanding of concepts associated with corporate insolvency law in Australia, in particular:

  • That the Bankruptcy Act 1966 (Cth) applies to personal bankruptcy, whereas corporations which are insolvent are subject to the Corporations Act 2001 (Cth).
  • That the term “corporate insolvency” means that a corporation is unable to pay debts as and when they become due and payable (section 95A Corporations Act), and that a general consideration of the term extends to forms of external insolvency administration, including liquidation (both in insolvency and as creditor winding up), voluntary administration pursuant to Part 5.3A, and receivership.
  • That in Australia we do not have an equivalent to Chapter 11 of the US Bankruptcy Act, where companies which are insolvent remain under the control of the directors with the Court’s supervision but continue to trade on, with a moratorium in respect of debt recovery.
  • That the regulator supervising corporations, including when they are insolvent, is the Australian Securities and Investments Commission (ASIC).

Corporate insolvency reform – what is happening?

Early in the decade I believe it is fair to say that the federal government had minimal interest in corporate insolvency reform. Financial services reform was flavour of the month… for a number of years. In more recent years however a number of reforms have emerged on the policy agenda, including some legislative reform in 2007 (Corporations Amendment (Insolvency) Act 2007 (Cth)). In particular, and in the wake of a number of high profile corporate collapses in Australia and overseas, the following major reform proposals have gained momentum during the last twelve months:

  • Reversal of the effect of the High Court decision in Sons of Gwalia v Margaretic.
  • A proposals paper considering possible action against fraudulent phoenix activity.
  • A Senate inquiry into the role of liquidators and administrators.
  • A proposals paper considering changes to insolvent trading laws, including the introduction of “safe harbour” provisions for directors of companies in financial difficulty.

A number of these proposals were flagged by the Minister for Financial Services, Superannuation and Corporate Law, Mr Chris Bowen, in his announcement of 19 January 2010 concerning a “Corporate Insolvency Law Reform Package”. This package also proposes the implementation of a number of minor reforms recommended by the Corporations and Markets Advisory Committee (CAMAC), and others identified by the Insolvency Practitioners Association (for example: streamlining the approval of provisional liquidator remuneration; streamlining the appointment of replacement external administrators in the event of a vacancy; empowering ASIC to take and transfer possession of records in the event of a vacancy in external administrator; and mandating the requirement to notifying creditors of material breaches of Deeds of Company Arrangements).  I do not propose to explore the list of proposed technical reforms. Rather, for the remainder of my paper I will examine the major areas of reform I have listed above.

Sons of Gwalia – proposal to reverse the effect of the decision

The High Court decision

In 2007 the High Court delivered its decision in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160. The case involved an examination of section 563A Corporations Act 2001 (Cth) which currently provides:

“Payment of a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.”

Section 563A is in Division 6 of Part 5.6 of the Act, which deals with proof and ranking of claims in winding up. Part 5.6 identifies priority creditors (in particular employees and their entitlements). The ranking of claims in Part 5.6 is also applicable in circumstances where creditors have approved a deed of arrangement in accordance with Part 5.3 of the Corporations Act.

In summary, Sons of Gwalia Ltd was a publicly listed gold mining company. On 18 August 2004, Mr Margaretic purchased 20,000 shares in the company at the cost of $26,200. It soon became apparent that, at that time of that purchase, shares in the company were actually worthless. On 29 August 2004 administrators were appointed to the company pursuant to section 436A of the Act. Mr Margaretic commenced action in the Federal Court of Australia claiming that the company had, in breach of the listing rules, failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its gold delivery contracts and that it could not continue as a going concern. Mr Margaretic claimed further that conduct of the company was misleading and deceptive; that it had contravened section 52 of the Trade Practices Act 1974 (Cth), section 1041H of the Corporations Act, and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth); and that he was entitled to compensation in respect of those contraventions.

The key question before the High Court was where Mr Margaretic’s claim would rank in the priority of debts provable in the liquidation of the company. In short – Mr Margaretic was a shareholder – was his claim in respect of monies owed to him by the company in his capacity as a member of the company for the purposes of section 563A, and therefore to be postponed until all debts owing to creditors had been discharged? If the answer to that question was in the affirmative, and therefore Mr Margaretic’s claim for compensation ranked behind debts owed to creditors of the company, the fact that the company was insolvent meant that the likelihood of Mr Margaretic receiving any compensation from the company was nil.

Before the High Court the company contended, in summary, that:

  • Mr Margaretic’s claim was made against the company of which he was a member; and
  • his claim concerned the value of the very shares by which his membership of that company was procured, that is, by the acquisition on the Australian Stock Exchange of the shares in the company at the then market rate for such shares.

However the High Court found for Mr Margaretic. In summary, the obligation which Mr Margaretic sought to enforce was not an obligation created in favour of the members of the company. Rather, insofar as it was based in statutory causes of action, it was rooted in:

  • the company’s contravention of the prohibition against engaging in misleading or deceptive conduct; and
  • the company’s liability to suffer an order for damages or other relief at the suit of any person who has suffered, or is likely to suffer, loss and damage as a result of the contravention.

In so far as the claim was put forward in the tort of deceit, it was a claim that stood altogether apart from any obligation created by the Act and owed by the company to its members (see explanation by Hayne J at [206]).

Accordingly the claims were not in respect of moneys “owed by a company to a person in the person’s capacity as a member of the company”. Section 563A did not apply to the claim made by Mr Margaretic.

Referral to CAMAC

The decision in Sons of Gwalia caused consternation in the business community, and celebration in shareholder circles. In early 2007 the federal government referred the decision of the High Court in Sons of Gwalia to CAMAC for consideration and advice.

In its report “Shareholder claims against insolvent companies: Implications of the Sons of Gwalia decision” issued in December 2008, CAMAC recommended that the decision of the High Court not be reversed through legislative reform. While the members of CAMAC were not of one view, as a whole the Committee was not persuaded of the need for change, in summary because:

  • In recent times legislation had provided direct rights of action to shareholders in respect of corporate misconduct. In conjunction with the strengthening of the regime for timely and reliable corporate reporting, this reflected clear legislative objectives supporting shareholder rights.
  • Any move to curtail the rights of recourse of aggrieved shareholders where a company was financially distressed could be seen as undermining the apparent legislative intent to empower investors.
  • It followed that the view that shareholding includes, as one of its elements, acceptance of the risk of being misled as a result of corporate misconduct, is contestable. Similarly it is not clear the shareholders have it within their means to avert corporate misconduct.
  • Shareholders and creditors share an interest in the promotion of an efficient and informed market.
  • While the decision in Sons of Gwalia might have consequences for companies seeking funds in the unsecured debt market, including influencing the readiness of investors to assist in the rehabilitation of financially-stressed companies, nonetheless:
    • aggrieved shareholders still needed to substantiate their claims of corporate misconduct; and
    • lenders may be able to protect their financial interests, including through creditors’ schemes of arrangement restricting shareholders’ rights in return for the further injection of capital.

Government response

Notwithstanding the recommendation of CAMAC, earlier this year the Federal government announced its intention to amend the law so that it substantially corresponded to the perceived position prior to the High Court’s decision. On 2 June 2010 the Minister for Home Affairs introduced the Corporations Amendment (Sons of Gwalia) Bill 2010 into the House of Representatives. In summary, the key aspects of the Bill are:

  • An acknowledgement that a person is not prevented from obtaining damages or other compensation from a company only because that person was or had been a shareholder of the company (proposed new section 247E).
  • The proposed repeal of section 563A of the Corporations Act, and enactment of a new section 563A which reads:

Postponing subordinate claims

The payment of a subordinate claim made against a company is to be postponed until all other claims made against the company are satisfied. In this section, subordinate claim means:

  1. a claim for a debt owed by the company to a person in the person’s capacity as a member of the company (whether by way of dividends, profits or otherwise); or
  2. any other claim that arises from a person buying, holding, selling or otherwise dealing in shares in the company.

Shareholders who have such grievances are entitled to receive a copy of any notice report or statement to creditors if they ask the administrator or liquidator of the company, in writing, for it, and are able to vote in their capacity as a creditor of the company during the external administration of the company only if the Court so orders (proposed section 600H).

The Minister explained in a press release that the government was concerned that the Sons of Gwalia decision had the potential to further increase uncertainty and costs associated with external administration, and that it had a potentially negative impact on business rescue procedures. (Minister for Financial Services, Superannuation and Corporate Law Media Release No 4, 19 January 2010)

It follows that, in substance, any claim by a shareholder against the company related to the value of their shares will be postponed to creditor claims in the event that the company becomes insolvent.

At the date of preparation of this paper the Bill had not been passed by both houses of parliament. On 23 June 2010, the Senate referred the Corporations Amendment (Sons of Gwalia) Bill 2010 to the Legal and Constitutional Affairs Legislation Committee for inquiry and report by 24 August 2010.

Action against fraudulent phoenix activity

In November 2009 Federal Treasury released a proposals paper with this title. Submissions were invited until 15 January 2010 although it is clear that some submissions were made after that date.

“Fraudulent phoenix activity” is described in the paper as involving “the evasion of tax and other liabilities such as employee entitlements through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.” It is often, but not exclusively, used in smaller enterprises when the key asset of a company is the personal skill of the person behind it. It is a misuse of the corporate veil and the traditional separation of a corporation from its owners, whereby a person (using a company) incurs debts, places the company in liquidation, and then incorporates another company. The term “phoenix” of course refers to the mythical firebird which, when dying, builds its own funeral pyre and self-immolates, but is reborn from the flames of that same pyre.

Fraudulent phoenix activity is not a trivial economic phenomenon. As the proposals paper notes, the ATO estimated that the stock of suspected phoenix cases it was monitoring in late 2009 posed a risk to the revenue of approximately $600 million.

The Cole Royal Commission into the Building and Construction Industry noted the prevalence of phoenix activity in that particular industry.

Common reasons for phoenix activity are that:

  • A small enterprise can undercut competition in the field and quote lower amounts for the same work. The reason for this is that the viable profit margin for the enterprise is lower – because, for example, no amounts are set aside for remittance of tax due or employee obligations. Commonly, profits are transferred from the entity before it is placed in liquidation, leaving the corporation an empty shell for remaining creditors.
  • The person behind the enterprise ensures that parties necessary to practical and ongoing functioning of the business (as distinct from the company) are paid, for example essential suppliers and key employees. Unfortunately, from the perspective of such persons, the ATO is, realistically speaking, not such a party.
  • As a general proposition the likelihood that regulatory authorities (such as the ATO in the case of failure to remit taxes or ASIC for breach of directors duties) or employees (in the case of failure to account employee entitlements) will commence action against the person behind the phoenix operation, is low. This is because:
    • In the case of the ATO – although for example Division 9 of Part VI of the Income Tax Assessment Act 1936 (Cth) imposes personal liability on directors of companies for unpaid PAYG (W) tax liabilities, the issuing of director penalty notices to crystallise a director’s debt is highly resource intensive.
    • In the case of ASIC – although the corporate regulator has a number of programs (for example to fund preliminary investigations by liquidators in respect of companies which have been left insolvent with little or no assets) the fund is not open-ended. Further, the ability of ASIC to prosecute directors of companies in respect of, for example, insolvent trading contrary to Part 5.7B of the Corporations Act is, realistically, limited by resource constraints.
    • In the case of unpaid employees, the reality is that, in most cases, they do not have deep pockets. As a general proposition, in the absence of, for example, union support to fund litigation, most employees would be unable to sustain legal proceedings in respect of unpaid entitlements.
  • Until recently, legislation had limited effect on phoenix activity. For example:
    • Despite the existing general anti-avoidance rule in Part IVA of the Income Tax Assessment Act which provides a means for the ATO to counter tax avoidance, this rule has limitations which make it of limited usefulness in the case of phoenix activity. This is because, for example, the rule provides the ATO with a remedy against the entity which avoided the liability (i.e. the company) not the architect of the phoenix scheme; and it does not apply to amounts included as assessable income, or a deduction, or a capital loss.
    • Section 213 of the Income Tax Assessment Act permits the Commissioner to seek a bond from a person who the Commissioner considers is likely to carry on a business for only a short period of time. The bond acts a security for tax on income that is anticipated to be generated by the business. However although the failure to provide the bond is an offence, until recently the penalty was only $2,200, which may be a limited disincentive to phoenix operators.

The government has put forward a number of options to address fraudulent activity, while recognising that it is important not to capture in the net innocent directors and corporations. As is observed in the proposals paper:

“This is particularly the case in the current economic climate where entrepreneurship and responsible risk taking need to be encouraged.” (paragraph 4.1)

Accordingly, the options propose the removal of incentives for engaging in fraudulent phoenix activity, while simultaneously forcing company directors to take greater responsibility for tax debts and superannuation provision. In summary, the options advanced are:

  • Expansion of remedies under taxation legislation including expanding the director penalty regime, and amending the bond provision so as to empower the Commissioner to require a bond in respect of liabilities often avoided through phoenix activity.
  • Expanding current provisions to permit disqualification of directors from managing corporations.
  • Restricting the use of a similar name or trading style by a successor company.

Security deposit

To my knowledge, no report has yet been issued by Treasury following up the proposals paper. However interestingly, some steps have already been taken to implement one option outlined in the paper. On 17 March 2010 the Tax Laws Amendment (Transfer of Provisions) Bill 2010 was introduced into the House of Representatives. One of the changes proposed by this Bill concerns the security deposit in section 213 of the Income Tax Assessment Act 1936 (Cth) to which I have already referred. The Bill expands the current requirement for a taxpayer to give a security deposit in respect of income tax liabilities, to extend to any existing or future tax-related liabilities. Proposed Subdivision 255-D in Schedule 1 to the Taxation Administration Act 1953 (Cth) provides that the Commissioner may require a taxpayer to make a security deposit if the Commissioner has reason to believe that:

  • the taxpayer is establishing or carrying on an enterprise in Australia, and intends to carry on that enterprise for a limited time only; or
  • the Commissioner reasonably believes that the requirement is otherwise appropriate having regard to all relevant circumstances.

(proposed section 255-100)

Interestingly, under the Bill the Commissioner may:

  • require the security deposit to be given by way of bond or deposit or by any means considered appropriate (proposed section 255-100(2)); and
  • require the taxpayer to give the security at any time and as often as the Commissioner reasonably believes is appropriate (proposed section 255-100(3)).

If the taxpayer fails to give the security the taxpayer commits an offence, the maximum penalty for which will be $11,000 (for an individual) and $55,000 (for a company).

As was made clear by the Assistant Treasurer, Senator Nick Sherry, in a media statement released on 17 March 2010, the intention of the legislation is to ensure that the Commissioner can require a security bond to cover all taxes administered by the ATO, including superannuation guarantee and GST payments (Senator Nick Sherry “Immediate Action to Assist in Crackdown on Fraudulent ‘Phoenix’ Activity” 17 March 2010).

At the date of writing this paper the Bill had been passed by both Houses of Parliament, with royal assent imminent. However already the Bill has been the subject of criticism by insolvency practitioners on the basis that “honest small businesses will suffer if the Australian Taxation Office is overzealous in applying it new power” under the legislation (“Small-business fears on phoenix laws” Australian Financial Review 30 June 2010 page 3).

Senate inquiry into the role of liquidators and administrators

On 25 November 2009 the Senate referred to its Economics References Committee an investigation into the role of liquidators and administrators, their fees and practices, and the involvement and activities of ASIC prior to and following the collapse of a business. Submissions were invited until 12 February 2010. The Committee is due to deliver its final report to the Senate by 31 August 2010.

The Senator who moved the reference, Senator John Williams from New South Wales, issued a press release stating that information he had received from a number of people prompted his call for the inquiry. The Senator stated:

“After hearing their stories, I am concerned there may be wrong doings, possibly the abuse of power and even corruption in some sectors of the industry. I believe this inquiry will determine if the processes are being followed correctly, or expose any problems that exist.

I have included the reference to ASIC because I don’t believe the organisation acts quickly enough on information provided to it, or even thoroughly investigates all matters.

It will be a chance to clear the air or if necessary seek reforms of an industry that will only grow stronger as more and more companies become insolvent.” (“Williams instigates inquiry into liquidators and administrators” 24 November 2009)

It is difficult to know at this stage what will emerge from this inquiry. A significant legislative review of corporate insolvency was conducted as recently as 2007 when amendments were made to the Corporations Act, including increased disclosure requirements on practitioners, and greater regulatory controls. However, a few points to note.

First, in its appearance before the inquiry ASIC rejected calls for its oversight of liquidators to be moved to an industry-specific regulator, such as Insolvency Trustee Service Australia (Transcript, Proof Committee Hansard, Senate Economics Reference Committee, Wednesday 23 June 2010 page 30 et seq), or for the creation of an ombudsman position to deal with complaints about insolvency practitioners. The criticism of ASIC as regulator of corporate insolvency, when it is not a specialist insolvency regulator, appears to have been a theme threading the Committee hearings (note comments of Senator Fierravanti-Wells at page 30 of Transcript, Proof Committee Hansard, Senate Economics Reference Committee, Wednesday 23 June 2010).

Second, in a report released on 24 June 2010 by the UK Office of Fair Trading entitled “The market for corporate insolvency practitioners”, the OFT recommended, among other things:

  • the establishment of an industry-funded independent complaints handling body with broad powers to review insolvency practitioner fees and actions, impose fines, and return overcharged fees to creditors; and
  •  the refocusing of the UK Insolvency Service as a dedicated regulator of the Recognised Professional Bodies, with a broad suite of proportionate oversight powers.

An obvious question is whether the inquiry will recommend the establishment of a single insolvency regulator and/or ombudsman.

Proposed changes to insolvent trading laws

At the same time as announcing the government’s intention to enact legislation reversing the effect of the High Court’s decision in Sons of Gwalia, Minister Bowen also released a discussion paper on the operation of Australia’s insolvent trading laws in the context of attempts at business rescue outside of external administration. The paper, “Insolvent trading: A safe harbour for reorganisation attempts outside of external administration” (19 January 2010). It appears the paper was released because concerns had been expressed to government that laws directed at preventing businesses from trading while insolvent can negatively impact on genuine work-out attempts. In particular, at paragraph 1.5 the paper notes:

“In the wake of the global financial crisis (GFC) some commentators have argued that there have been significant negative impacts on the availability of credit, leading to both an increase in reorganisation attempts and increased difficulties for companies in maintaining solvency on a short-term basis while an informal work-out outside of  external administration ‘work-out’ is attempted. It may be that the reduction in credit availability has precluded some companies from attempting a work-out at all when faced with the personal liability of directors for insolvent trading.”

The paper notes further that this impact may be responsible for a shift, in the wake of the GFC, in stakeholder focus away from arguments for the application of a broad general defence for insolvent trading, towards exploring a solution to how the law impacts on informal work-outs outside of external administration.

As the law stands at present, in summary:

  • A company is solvent if it is able to pay all of its debts as and when they become due and payable. If the company cannot do this, it is insolvent (section 95A Corporations Act).
  • Under section 588G Corporations Act, a director of a company may be liable for debts incurred by the company incurred at such time as:
    • the person is a director of the company; and
    • the company is insolvent at the time the debt is incurred, or becomes insolvent by reason of incurring that debt; and
    • at that time, there were reasonable grounds for suspecting that the company was insolvent, or would become insolvent.
  • A director can raise a defence against liability for insolvent trading under section 588H (2) if:
    • The director had reasonable grounds to expect the company was solvent at the time the debt was incurred.
    • The director had reasonable grounds to believe that a competent and reliable person was responsible for providing him or her with information about the company’s solvency, that the person was fulfilling their responsibility, and that on the basis of the information provided the director expected that the company was solvent.
    • The director did not participate in the management of the company at the time the debt was incurred because of illness or some other good reason.
    • The director took all reasonable steps to prevent the debt being incurred.
  • The Court may relieve a director from civil liability for beach of duty if the Court considers that the director had acted honestly and, in the circumstances, the director ought be so relieved: section 1317S and section 1318 Corporations Act.
  • The insolvent trading provisions are civil penalty provisions, however a director may also be criminally liable if the director’s failure to prevent the company incurring the debt was dishonest: section 588G(3)-(3B) Corporations Act.
  • A common – and quick – way for directors to avoid liability for insolvent trading in respect of a company which is on the verge of trading whilst insolvent is to place the company in voluntary administration in accordance with Part 5.3A Corporations Act. Alternatively, the directors may place the company in voluntary liquidation.

Interestingly, the paper recognises that there are advantages for both the company and creditors in the company pursuing the solution of a “work-out”, rather than placing the company into one of the forms of insolvency administration sanctioned by the Corporations Act. Advantages include:

  • The existing management retaining control of the enterprise. This not only retains the knowledge and skills of existing management, but provides the opportunity for the company to continue “business as usual” which may preserve value in the entity.
  • The fact that termination, variation or penalty clauses in existing contracts to which the company is a party will not necessarily be triggered by an informal work-out, a result which commonly occurs where the company enters external administration.
  • Cost advantages, in particular the fact that the company is able to avoid the expense of an insolvency practitioner as an external administrator.
  • Generally the work-out is negotiated only with key stakeholders, therefore avoiding the cost of dealing with all creditors.

The paper also recognises the disadvantages however of lack of transparency and accountability, and the risks which continue to apply to directors during the work-out period.

Accordingly the paper proposes three options:

  • Maintenance of the status quo.
  • Creation of a “safe harbour” for directors in informal work-outs from insolvent trading. The two safe harbour options proposed are:
    • A business judgment rule for insolvent trading – that is, a director would be relieved from liability for insolvent trading where he or she has acted according to a particular formula to make a business judgment that the interests of the company’s body of creditors as a whole would be best served by pursuing the work-out. The proposed formula is as follows:
      • 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 an appropriately experienced and qualified professional, with access to those accounts and records, as to the feasibility of and means for ensuring that the company would remain solvent by the proposed restructuring;
      • It was the director’s business judgment that the interests of the company’s body of creditors as a whole, as well as members, was best served by pursuing the restructuring; and
      • The restructuring was diligently pursued by the director.
    • The provision of a moratorium from the insolvent trading laws, to be expressly and openly invoked by the company. In this option, the company informs the market that the company is insolvent and intends to pursue a work-out outside of external administration. The proposals paper does not prescribe conditions of the moratorium, rather it seeks submissions as to how it would work.

The moratorium proposal is in some ways the most interesting option. It was immediately picked up by the press as mooting the introduction of US-style Chapter 11 bankruptcy protection provisions into Australian law, a development called for in certain sectors since the big corporate collapses of the early 2000’s. However on balance it would probably be easier for the government to adopt the proposal concerning a business judgment rule for insolvent trading. This is because:

  • it would be a less radical option than the adoption of a version of Chapter 11; and
  • the business judgment rule is already recognised as a defence to a claim of breach by a director of the duty of care and diligence in section 180 Corporations Act and to that extent is already part of corporate law in this country.

Indeed I note that Minister conceded that “going down the road of a business judgement rule has a certain attraction.” (Interview with Carson Scott, Law TV on Sky Business 24 February 2010)

The closing date for submissions in respect of these proposals was 2 March 2010.


At the time of preparation of this paper the date of the next federal election had not been announced. There is a long history of reform proposals failing to survive an election, particularly (and obviously) if the government changes. As I have already noted, some of the proposed reforms relating to corporate insolvency have progressed this year to Bill stage. I suggest that, even if progress on these reforms stalls because an election is called, the interest of the business community and insolvency practitioners may ensure that momentum continues. I make this tentative prediction in light of continuing (and dire) predictions about the state of the world economy and its potential impact on the Australian corporate environment.