Recent insolvency research papers


Prof. Ian Ramsay and Stacey Steele from the Melbourne Law School have recently completed 2 research papers that might be of interest to ARITA members.

Insolvent Trading in Australia: A Study of Court Judgments from 2004 to 2017

Insolvency Law Journal, Vol. 27, No. 3, pp. 156-184, 2019

The duty imposed on company directors under Australian law to not have the company of which they are a director trade while it is insolvent is controversial. The recent introduction of a safe harbour for directors’ personal liability for breach of the duty to prevent insolvent trading highlights the ongoing controversy surrounding this duty.

This article presents the findings from a study of judgments of courts which considered the duty to prevent insolvent trading from 2004 to 2017. Directors were found liable in 72% of the judgments but the success rate differed significantly depending on who was the plaintiff. In cases brought by liquidators, the plaintiff was successful in 84% of the cases.

In cases brought by creditors, the plaintiff was successful in only 42% of the cases. Almost 60% of compensation orders made against directors were for less than $500,000, but about one third of judgments involved compensation orders of over $1 million. The study also found there was no judgment in which a director successfully argued one of the statutory defences to an insolvent trading claim.

Insolvency Law Reform in Australia & Singapore: Directors’ Liability for Insolvent Trading & Wrongful Trading

International Insolvency Review, Vol. 28, No. 3, pp. 363-391, 2019

This article compares reforms to directors’ liability for insolvent trading in Singapore and Australia. The authors analyse the law in these two countries because they are important Asia-Pacific trading partners and their laws were originally largely the same – Singapore’s law on insolvent trading reflected the law in Australia from the 1960s.

However, the law in the two countries has now diverged substantially. The comparison of these two countries therefore represents an interesting case study in how countries differ in their approaches to balancing the competing interests evident in laws that impose personal liability on company directors for insolvent trading.

Reform of the prohibition against insolvent trading was a focus of Australia’s insolvency law reforms in 2017 which led to the introduction of a safe harbour for directors from liability. Singapore’s omnibus insolvency law reforms of 2018–19 include amendments to update Singapore’s fraudulent and insolvent trading provisions by introducing a concept of ‘wrongful trading’.

The article finds that there are some areas of convergence between these two jurisdictions when it comes to debates about such provisions, but concludes that the different contemporary legislative histories in Australia and Singapore have affected their approaches to reform.

Reformers in both jurisdictions have attempted to find an appropriate balance between protecting creditors, discouraging director misconduct and encouraging entrepreneurship and innovation. However, this comparison suggests that the weight that reformers place on creditor protection compared to the concern that excessive personal liability can make directors unduly risk-averse is influenced by their existing legislative framework and experience of those laws.

Although Australia has shifted away from a strict focus on creditor protection, to give directors more opportunities to engage in restructuring, Singapore’s amendments may provide a more creditor-friendly regime.