Melbourne, 16 June 2004 – LAWFUEL – Directors have only a one in four…

Melbourne, 16 June 2004 – LAWFUEL – Directors have only a one in four chance of beating an insolvent trading claim according to a new report by law firm Clayton Utz and the Centre for Corporate Law and Securities Regulation. The Report, prepared by Clayton Utz partner Paul James, and Professor Ian Ramsay of the University of Melbourne, found that 75 per cent of cases against directors for insolvent trading end up in a loss for the director.

The Report is believed to be the first to examine data from every insolvent trading case since the introduction of the insolvent trading provisions in 1961.

“This new data shows that directors have little chance of escape once insolvent trading proceedings commence and that directors of private companies are most at risk representing 91 per cent of cases. Our research found that 55 per cent of cases involved executive directors and 22 per cent involved non-executive directors. In about 64 per cent of cases the debt being claimed from a director related to the purchase of goods and services by the company. Loans from a bank or other financier accounted for another 8 per cent of cases,” said Mr James.

The study covered all insolvent trading cases where a judgment was handed down and found that the number of cases rose steadily from 1961 and peaked in the 1990s (over half the cases are from the 1990s). Since the end of the 1990s there have only been 15 cases decided. In 40 years, only 103 cases went to judgment. Directors were held liable in 75 per cent of those cases.

“Based on the data included in the Report, it suggests that only the strongest cases make it to court and directors appear more willing to settle insolvent trading claims out of court.

“Although insolvent trading can result in a director being fined or banned, it is far more likely that the director will simply be faced with an order to pay compensation to the company and/or the company’s creditors. However, the size of that compensation order can be as crippling as a fine or ban,” said Mr James.

The smallest compensation order revealed in the Report was $517. The largest was $96.7 million, and the median amount of compensation was $110,600. It should be noted that compensation orders are directly linked to the amount of unpaid debts incurred during the period the company traded whilst insolvent.

Other orders, such as banning a director from managing companies for a specified period of time or imposing pecuniary penalties are relatively rare. “We found only seven cases where these punitive orders were imposed and only two cases imposed banning orders. However, civil penalty provisions (under which pecuniary penalties and management banning orders are made) have only been in force since 1993. It’s likely however, that with the introduction of the National Insolvency Coordination Unit by ASIC and other ASIC initiatives, the number and proportion of these cases may increase”, said Mr James.

The Report also highlights some interesting data about the types of industries or companies that are most commonly the subject of insolvent trading cases mentioned above. Construction companies featured in 22 per cent of cases. Retail trade and manufacturing companies accounted for 17 per cent each.

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