Advocating for improvements to insolvency laws

The AICD’s advocacy team represents the interests of members in public debate and to governments.

Advocating for improvements to insolvency laws

The Australian Institute of Company Directors (AICD) has long argued that a change to Australia’s insolvency laws will encourage innovation, support businesses in difficulty, allow sensible risk taking, and help reignite productivity growth. We recently made a submission outlining this view in response to a public consultation on insolvency laws.

The Government’s proposal includes a long-overdue measure for a safe harbour. At present, directors of companies nearing insolvency have few options other than to call in administrators and watch as lenders appoint receivers, or risk personal liability. A safe harbour would allow directors of financially distressed companies to take reasonable steps to turn around viable businesses outside the framework of formal insolvency.

We suggest a workable safe harbour will need to provide sufficient:

• Certainty to guide directors as they steer companies through the “Twilight Zone of insolvency”.
• Flexibility so that it can be applied by all directors, irrespective of the company.
• Utility so that it can be applied by directors in a timely manner with recognition of stakeholder interests.

The consultation paper sets out two options for a safe harbour. We strongly feel that Model B, with some modifications, better achieves the objectives of reform.

Broadly speaking, Model B requires directors to take reasonable steps to maintain or return a company to solvency within a reasonable period, provided they believe that doing so is in the company’s best interests.

Our submission cautioned against taking a prescriptive, ‘tick-the-box’ approach to a safe harbour, on the basis that the complexities of troubled businesses require a principles-based approach.

The AICD’s concern with Model A, the proposed alternative, is that it is not practical. The defence would only be available to directors if, at the time the relevant debt was incurred, the directors had: (a) appointed an appropriately informed accredited “restructuring adviser” who had investigated the company’s situation and formed a view that the company was likely to be capable of being returned to solvency; (b) formed an expectation, based on the restructuring advice, that the company could be returned to solvency; and (c) started taking reasonable steps to ensure it did so. Another problem with this model is that it places the onus of proof on directors so that they have to prove their innocence.

Ipso facto clauses

Another proposal would restrict ipso facto clauses once formal insolvency measures have been taken. This would allow companies in voluntary administration to preserve key contracts so they can continue to trade, allowing them to remain viable while restructuring rather than becoming carcasses for creditors. Importantly, the restriction would not affect creditors’ rights should the company fail to perform its obligations under a contract. The AICD supports this proposal, subject to appropriate checks and balances.

Overall, the AICD considers that the proposed reforms will encourage innovation. If implemented properly, they will allow viable companies to trade through difficult times and could save, rather than destroy, billions in wealth and thousands of jobs.

Roundtables on accounting standards

The AICD is working with the Australian Accounting Standards Board (AASB) to facilitate consultations with directors to discuss their experience with Australian accounting standards. Two forums were held in June in Melbourne and Sydney, comprising directors from the private and not-for-profit (NFP) sectors.

Australian accounting standards are used to prepare financial reports for listed companies, government bodies, many private companies and NFP organisations, and set the standard on how finances must be treated, recorded and reported. Directors are a key stakeholder group for standard setting. 

Australian accounting standards changed significantly 10 years ago when it was determined that they would be based on International Financial Reporting Standards. Recognising this, the AASB is providing stakeholders with the opportunity to discuss their experience of adopting and implementing the standards during this time.

Reforming fundraising through the Australian Consumer Law

The regulation of fundraising is duplicative, inconsistent and complex, causing unnecessary delays and wasting valuable resources. Because fundraising is regulated at the state and territory level, NFPs must meet the requirements of each jurisdiction in which they operate. 

The Australian Government is currently undertaking a review into Australian Consumer Law (ACL). The review is considering whether the ACL should apply to NFPs, among other things.

The AICD believes that this review provides an opportunity to lay a foundation for a broader reform of fundraising regulation across Australia and has made a formal submission to this effect. Such a reform was included as part of the AICD’s call for a national NFP regulation reform outlined in the Blueprint for Growth launched earlier this year.