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Why Is Insolvency Law Important In Australia

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Insolvency happens when the company is incapable of paying its debts when they are due and payable. In Australia, laws in insolvent trading are framed in a manner that imposes personal liabilities upon directors for debts incurred whilst the company is insolvent. With the release of the “Exposure Draft” by the Minister for Revenue and Financial Services, the government is seeking to reform Australia’s insolvent trading laws to provide defences to directors by creating a ‘safe harbour’ to allow a company to continue to trade on when it is in a doubtful state of solvency.[1- kpmg newsroom] This long-awaited legislation intended to achieve several goals: to ‘drive cultural changing amongst directors by encouraging them to take a proactive approach …show more content…

The aim of the laws is to ensure that the returns for creditors of insolvent companies are maximized. However, these laws are often criticized are being too rigid and onerous and drives directors to limit personal liability by appointing voluntary administrator prematurely, even when the company may still be viable. The preamble of the draft states that “concerns over unintentional infringement of insolvent trading laws are frequently cited reasons” that contribute to the reluctance behavior of investors and directors to be engaged in restructuring or rescue efforts.[2- Explanatory …show more content…

The Productivity Commission has identified the key drivers that encourage the unduly risk-averse attitude of directors, they are namely the current insolvent trading laws, the uncertainty regarding to the precise moments of insolvency. It can be argued that S588H provides defenses to relief directors from the breach of duties but the section only provides statutory defenses that are only applicable to contraventions of civil penalty but not a criminal offence, thus these defenses have brought disincentives to directors to undertake appropriate

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