14 Dec 2015

New dangers in safe harbour rules

by Karen O'Flynn

You can lead a director to the safe harbour, but you can't make him drink.

The Government's new approach to insolvency is long on rhetoric about risk taking and the need to remove the stigma of business failure.

However, it is short on detailed consideration of exactly why we have legal rules for corporate and personal insolvency.

Those rules aim to balance the interests of creditors against the need to encourage business start-ups.

There is no objective evidence that the current system is slanted too heavily against entrepreneurs.

For every trade creditor of a failed business who receives more than 50 in the dollar, there are hundreds, if not thousands, who see only a tiny fraction of that The government's proposal to allow companies to trade while insolvent is unlikely to improve those figures.

And what will be the countervailing benefit?

The idea that directors of falling companies will somehow embrace the new safe harbour proposal by commissioning a professional restructuring plan runs counter to everything that we know.

The current voluntary administration regime provides incentives for directors to call in professional restructuring help. Talk to any liquidator-administrator and you'll be told that they're mostly called in when the company is already beyond saving.

Where is the evidence that that behaviour will change under the safe harbour proposal?

In short, you can lead a director to the safe harbour, but you can't make him drink.

This was first published in the Australian Financial Review, Monday 14 December 2015

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.