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Insolvent Trading

The Federal Government has recently released a discussion paper on the operation of our insolvency trading laws.

The paper raises possible options for reform and notes that informal workouts play an important role in business rescues.

One of the options set out in the insolvency trading discussion paper is to adopt modified business judgement rules in respect of a director's duty to prevent insolvent trading. The paper discusses that under this option, the business judgement rule would be modified so that directors would not be considered to have breached their duty not to trade whilst the company was insolvent if (a) the financial accounting records of the company presented a true and fair picture of its financial circumstances and (b) the directors were appropriately informed of restructuring alternatives based on these accounting records and (c) it was the director's business judgement that the interests of both the company's members and creditors would be best served by pursuing the restructuring and (d) the restructuring was diligently pursued by the directors.

A further option includes adopting a mechanism for invoking a moratorium from the insolvent trading prohibition whilst workouts are attempted. This option provides for the company to inform existing and potential creditors that the company was insolvent and intended to pursue workouts outside external administration. It is suggested that the moratorium would apply thereafter during which insolvent trading would be permitted and the moratorium could be brought to an end by creditors either passing a resolution or by obtaining a Court order.

We await further details of the proposals.

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