A BRISBANE lawyer has called for insolvency law reform to prevent businesses collapsing when they have a reasonable ability to trade their way out of difficulties.
McCullough Robertson partner Scott Butler says under existing laws, directors must not allow their company to incur a debt unless they have a reasonably held expectation that it is solvent, but this is preventing otherwise creditworthy companies acquiring funding to keep themselves afloat.
“My view would be that where directors are forced in a position either to incur debt and trade or not to survive the downturn, the test should be whether the decision to trade is reasonable or not,” says Butler.
“In the UK it’s called wrongful trading and their courts applied it to realise that if a director makes a tough decision, they look at it from the standard of what a reasonable business person would do,” he says.
“It’s better to save a situation rather than never give that opportunity and my view is that in a lot of cases some shareholder value could be saved, businesses can survive and employees don’t have to be sacked.”
The reforms Butler is suggesting have also been referred to as ‘reckless trading’ and apply even before insolvency, allowing directors to take more responsibility.
But The Corporations Act 2001 leaves directors open to civil and possibly criminal penalties, as well as being personally liable to compensate for losses if insolvent trading occurs.
“This legislation means that directors are walking a legal tightrope if they attempt to keep their businesses afloat rather than declaring insolvency.”
Butler has recently joined McCullough Robertson’s insolvency team which he expects to grow by 50 per cent – an increase roughly in proportion to the amount of new insolvency litigation cases the firm has been experiencing.
“Insolvency cases have increased by that amount if not more,” he says.
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