Following on from the Government’s National Innovation and Science Agenda,the Productivity Commission’s report into Business Set-Up, Transfer and Closure (‘the report’) released in December 2015 called for a number of reforms to the Corporations Act 2001 (Cth) (‘the Act’), that aim to reduce the stigma associated with insolvency and to assist recovery. We discuss two of these below.

‘Small liquidation’ process

The report called for the introduction of a simplified ‘small liquidation’ process for companies, with liabilities to different creditors of less than $250,000, entering into voluntary liquidation. The objective of this reform is to streamline the liquidation process for companies with little or no recoverable assets by addressing the compliance costs and fees which can often outweigh the liabilities of an insolvent company.

Liquidations under the streamlined process

In order to initiate liquidation under this process, the directors would lodge a petition with the Australian Securities and Investments Commission (‘ASIC’) and verify that the company’s records and accounts are accurate. A liquidator would then be appointed from a panel of ASIC approved liquidators, who will be able to apply to ASIC to recover the balance of their fees unrecoverable from the liquidation from the Assetless Administration Fund.

The primary role of the liquidator, once appointed, will be to ascertain the available funds of the company, whilst reducing the compliance requirements according to the circumstances of the liquidation.

However, creditors will not be placed at a disadvantage under the ‘small liquidation’ process. Under this process, creditors will be able to elect or vote to revert to the standard voluntary liquidation process.

Insolvent trading

Directors in Australia face onerous duties in regards to insolvent trading.Under section 588G of the Act, the directors may be held personally liable if during their tenure:

  1. The company has incurred debt whilst insolvent, or becomes insolvent as a result of the debt; and
  2. At the time there are reasonable grounds to suspect the company’s potential or actual insolvency.

Section 588H of the Act affords defences to directors who have contravened the insolvent trading provision, in brief, these are where:

  1. There were reasonable grounds to expect and they did expect the company to be solvent;
  2. They had reasonable grounds to believe and did believe that a competent person was providing sufficient and adequate information to them, about whether the company was solvent and the other person was fulfilling that responsibility and expected on the basis of the information that the company was solvent;
  3. The directors were unable to participate in the management of the company due to illness or other good reason;
  4. The directors took all reasonable steps to prevent the company from incurring the debt.

Further, in determining whether a defence under paragraph 4 has been proved, the court will consider any action taken by a director for the purposes of appointing an administrator, when such action was taken and the outcome of the action.

‘Safe harbour’ provision

The existing insolvent trading laws stifle innovation and entrepreneurship. Despite the available defences, the fear of personal liability has created a tendency of risk aversion, and directors of companies experiencing financial difficulties often opt to prematurely put the company in voluntary liquidation or administration. Echoing many academics in the field, the Commission has proposed a ‘safe harbour’ provision where directors are protected from personal liability for insolvent trading if a restructuring adviser has been appointed to assist with the company’s financial difficulties.

The introduction of the ‘safe harbour’ provision will allow many businesses the chance to continue trading through difficult times in order to become profitable, saving jobs and protecting unsecured creditors. Furthermore, this will encourage directors to embrace the risk of failure in the pursuit of success.

Despite the promising prospects of these reforms, it is important to note that they have not yet been incorporated into the Act.