Director Liability for Insolvent Trading: Why a Business Judgment Rule is Appropriate

ANU College of Law Honours Thesis

ANU College of Law Research Paper No. 12-21

77 Pages Posted: 5 Jul 2012 Last revised: 7 Jul 2012

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Jim Hartley

affiliation not provided to SSRN

Date Written: June 6, 2011

Abstract

This paper was submitted as an honours thesis to the ANU College of Law under the supervision of Professor Stephen Bottomley.

On 19 January 2010 the Dept. of Treasury released a discussion paper on the subject of whether a business judgment rule should exist in respect of the insolvent trading provisions of the Corporations Act.

The proposal of this paper was that there should indeed be such a rule. The paper commences by examining the rationale for insolvent trading provisions. It is argued that the theoretical underpinning of director liability for insolvent trading — creditor protection and prevention of excessive risk — is misconceived. This is primarily because on a risk-adjusted basis unsecured creditors are overcompensated in that they receive an interest rate calculated to compensate for the risk of insolvency, and thus any money recovered from directors in insolvency personally is an enforcement windfall.

It was also argued that insolvent trading provisions are, quite apart from unnecessary, undesirable and harmful to stakeholders by reason that they foster undue risk-aversion, diminish the pool of directors, and reduce enterprise value. There is a brief analysis of the benefits of restructuring in insolvency.

The paper concludes by canvassing reform proposals and arguing that the appropriate reform would be to excuse those directors that satisfy a business judgment rule.

On 29 September 2011 the Department indicated that no such reform would be enacted.

Suggested Citation

Hartley, Jim, Director Liability for Insolvent Trading: Why a Business Judgment Rule is Appropriate (June 6, 2011). ANU College of Law Honours Thesis, ANU College of Law Research Paper No. 12-21, Available at SSRN: https://ssrn.com/abstract=2100638

Jim Hartley (Contact Author)

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