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Director Liability for Insolvent Trading: Is the Cure Worse than the Disease?

15 Pages Posted: 2 Oct 2009 Last revised: 6 Oct 2009

Jason Harris

University of Technology Sydney, Faculty of Law

Date Written: October 1, 2009

Abstract

The Global Financial Crisis has shone a bright light on the efficacy and scope of Australia’s corporate and financial regulatory system. The past year has seen several significant changes introduced, many of which have given more power and responsibility to Australia's corporate regulator ASIC. In some cases, greater regulatory attention and tougher legislative provisions have been needed and will hopefully provide for better outcomes for the Australian community. There is at least one area where the regulatory failings have been highlighted by the GFC and yet government attention has been conspicuously absent: insolvent trading. The economic challenges produced by the GFC have highlighted the need for effective restructuring and corporate rescue laws that encourage directors and managers to act to save businesses that are capable of saving but are suffering financial distress, in many cases because of broader market changes and depressed asset prices. This article discusses the disincentive for corporate restructuring posed by the insolvent trading prohibition by undertaking a comparative analysis of insolvent trading provisions in five industrialised countries. The author argues that Australia’s insolvent trading prohibition does not sufficiently promote corporate restructuring and therefore requires amendment. Particular law reform measures are suggested for consideration.

Keywords: Directors duties during insolvency, insolvent trading, corporate reorganisation, restructuring

JEL Classification: K22

Suggested Citation

Harris, Jason, Director Liability for Insolvent Trading: Is the Cure Worse than the Disease? (October 1, 2009). Australian Journal of Corporate Law, Vol. 23, No. 3. Available at SSRN: https://ssrn.com/abstract=1481542

Jason Harris (Contact Author)

University of Technology Sydney, Faculty of Law ( email )

Australia

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