How and Why the Current Law Would Be Reformed - Assignment Example

rроrаtiоn Lаw Rеsеаrсh By student’s name Course code+ name Professor’s name University name City, state Date of submission Соrроrаtiоn Lаw Rеsеаrсh Before achieving success in business, entrepreneurs will in most cases encounter some failures. If an entrepreneur fails in successfully building a business, often they face stigma and victimization. The current Australian insolvency laws stress a lot on punishing and stigmatizing the failures (Myers et al. 2014, 78). To create a healthy business environment that will allow these entrepreneurs to thrive requires a change in the culture. The proposals by the Treasury Department of the Australian Government released on 29 April 2016 suggest measures that will bring an equilibrium between promoting entrepreneurship and guarding lenders (Bromberg and Irving 2007, 56). Gradually, the stigma associated with business failures will hopefully subside. This paper analyses the proposals by the Treasury Department of the Australian Government to protect investors in case of insolvency. The portion of ‘safe harbour' outlined government plans to undertake safe harbour for entrepreneurs from insolvent provisions stated in Corporation Act 2001. The Australian government set out to gather the opinions of the public on two initial proposals. In the current laws, an entrepreneur or company director may be granted insolvent trading under three of the following circumstances (Farrar et al. 2016, 98); one is if at the time the business incurs a debt they were a director. Secondly is if the company at that time is bankrupt or it becomes so by incurring the debt. Thirdly, a director may be granted insolvency if, at that point, there're solid reasons to show that the business is bankrupt or would become so in the near future. The safe harbour model A The model is engineered to conserve business value and present a cost-efficient and versatile method to maneuver through cash flow issues outside the official administration. The 2015 Productivity Commission report on Business Set-up, Transfer and Closure suggested that a safe harbour built around the appointment of directors of expert change adviser will enable entrepreneurs to make decisions to do with a possible change of the business without the fear of being held responsible. It will also give entrepreneurs to make shifts in the business with the option that enable then have control of the company while getting professional advice without the necessity of giving up the power to an external administrator. The government concurs that it is vital that this happens in an environment which still addresses creditors interest. The Corporation Act also stresses on the need of businesses keeping and maintaining updated financial records. Per Whincop (2005, 76). Adequate financial records stating financial position and all past transactions is, therefore, an important factor to consider before the appointment of an adviser. The restructuring adviser The person appointed by a company as an adviser would require necessary qualifications and experience. It would be the duty of the company’s directors to ensure that the person appointed to oversee the restricting process possesses the requisite experience and qualifications suitable for the nature and situation of the business. The officers play a vital role of gatekeeping in a safe harbour. Thus, the government proposes that for an individual to be appointed to the position, they should be members of a certified organization approved by the ministry. The organization should have its ethical standards, disciplinary, and educational framework. Such potential includes but not limited to the Turnaround Management Association, the Law Society, CPA Australia, and the Chartered Accountants Australia and New Zealand. Additional, the government proposes that other factors be considered by the directors when appointing the officer to be set out to guide. It will be the role of the restructuring officer to decide on the viability of the business. The government considers two tests of viability. One is whether the company can avoid insolvent liquidation. Furthermore, it considers if the company can return to its normal financial condition given time. For the restructuring advisers to effectively carry out their mandates, they would have some protections and obligations. They would be appointed by the company and not its directors. Thus, they’re indebted to the company to perform any duties. The officer would also be required to execute their powers and perform their roles for the best interest of the company and report any misconduct noted to the ASIC. Moreover, they would not be legally answerable to third parties for a wrong opinion given that it was done in a reasonable and honest way. For the officers to be appointed in any subsequent bankruptcy case, it should be granted by the court. Finally, the restructuring officer will be clearly excluded from the broad definition of a director as contained in the Corporations Act. The safe harbour proposals act as the only defense to the bankruptcy trading provisions (s588G) available in the Corporations Act. Entrepreneurs remain bound to any other requirement by the law, not withholding the unrelated directors' related transaction provision. If a company is declared, the Safe Harbour will not stop any civil claim against a director connected to pending employee entitlements accumulated during the safe harbour period. In the same way, the time during which the safe harbour applies should be ignored for reasons of computing any reach-back interval for director-related company transactions. The proposal’s aim is to promote entrepreneurs to accept financial challenges early and to try out other unofficial methods where necessary. In Australia and oversee markets, informal actions have indicated that a crucial factor in their success is privacy. There are various circumstances under which safe harbour is not available. One is when a director is terminated from leading a company at the period the debt was incurred. Secondly is when the ASIC or court of law determines that the person is undependable on the defense due to their previous conduct. Additionally, the safe harbour would not be present when a business has subsequently failed to issue Business Activity Statement. Moreover, when there's remarkable failure of the business to pay PAYG, claims, superannuation, and benefits which accrued during the time of safe harbour. Safe Harbour Model B A director will be held accountable under Australia's bankruptcy trading provisions if, at the period of incurring a debt they were the manager of the company. Furthermore, the business becomes bankrupt at the stipulated time or becomes insolvent by incurring the debt. Lastly, a director may be answerable if there are concrete evidence for suspecting that the business is bankrupt or will become so. Rather than stressing on the conduct of directors incurring the debt, article s588G of the Corporations Act focuses on the solvency of a business, the information of the directors on its solvency, and the period of incurring the debt. How and why the current law would be reformed I believe the current law requires reforms. The fact that there’s a pending dilemma or loopholes in the current laws warrants adjustments to it (Clark et al. 2016, 69). One way in which the reforms can be done is by shortening the current default insolvency period from three years to just a year. Another way is by announcing a ‘safe harbour’ for entrepreneurs from individual liability for bankrupt trading if the business undertakes a restructure. Finally, preventing the enforcing of the ‘ipso facto’ clause which permits contracts to be ended primarily due to insolvency case (Anon 2010, 78). There're several reasons as to why it's important to reform the current laws. To begin with, the reforms stresses on changing the structure of business, enhancing their chances of survival and preserving their value. If the reforms are successful, it will be a positive impact for shareholders, staff, customers and creditors. Another reason why the current laws require reforms is that it will a responsibility on the directors' part to inform creditors that the company is financially challenged and working around the clock to improve the situation. Furthermore, the current laws if reformed will encourage directors to act much earlier when facing tough financial times, unlike now. The proposal of having a restructuring adviser will act as good reassurance to stakeholders, external parties, creditors and employees that a capable person is in the company working hard to improve the insolvent situation. Conclusion. It will be prudent if the reforms proposed by the Treasury Department of the Australian Government are implemented. People will in most cases always fail severally before succeeding in business. The current solvency laws put a lot of focus on punishing and stigmatizing failed entrepreneurs. The forms will enable more Australians to embrace risky business without the fear of failure. Reference Bromberg, M. & Irving, M., 2007. Australian Charter of Employment Rights, Victoria, Australia: Australian Institute of Employment Rights. Farrar, John H. & Hanrahan, Pamela, 2016. Corporate governance, Place of publication not identified: Lexisnexis Butterworths. Whincop, M.J., 2005. Corporate governance in government corporations, Aldershot, Hants, England: Ashgate. Anon, Insolvency law reforms and the implications for Australian business. Insolvency & Business Recovery Accountants- BRI Ferrier. Available at: http://briferrier.com.au/news/insolvency-law-reforms-and-the-implications-for-australian-business [Accessed March 23, 2017]. Anon, 1970. Improving insolvency laws to encourage innovation. National Innovation and Science Agenda. Available at: https://www.innovation.gov.au/page/insolvency-laws-reform [Accessed March 23, 2017]. Anon, 2010. Insolvent trading: a safe harbour for reorganization attempts outside of external administration, Canberra: Treasury. Clark, E.E., Stuyck, J. & Terryn, E., 2016. Commercial and economic law in Australia, Alphen aan den Rijn, The Netherlands: Kluwer Law International. Myers, C.A. & Williford, K.T., 2014. Corporate compliance answer book, 2015, New York City: Practising Law Institute. Read More