Essay Sample on Prevention of Insolvent Trading

3 pages
611 words
University of Richmond
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Insolvent trading is a law that makes a director of an organization to be personally responsible for new debts if he allows the insolvent company to incur debts further. However, the parliament of the Commonwealth of Australia recently proposed a bill that defends S588G to prevent insolvent trading. This bill has attracted diverse reactions due to suggestion that the directors are only liable for the debts if they are not taking positive actions that can positively impact the creditors and the company itself (Chapple & Routledge, 2015).

Firstly, this bill will hugely boost the directors to carry on with the activities of their company while engaging early signs of insolvency. It gives the directors a quiet time to initiate the process of mitigating risks to enable the firm to recover instead of being put into liquidation. Additionally, the bill will allow the company to continue trading to restructure and return to normal operations successfully (Chapple & Routledge, 2015).

If this bill is made to be a law, it will promote the protection of enterprise value of organizations, its staff, and creditors. This results to minimization of the stigma associated with being insolvent and inspires the philosophy of entrepreneurship in long-term (Plessis & Mathiopoulos, 2016). Moreover, the proposed defense will successfully strike a balance between honest directors and creditors. The directors can innovate risks that will turn the company around without being undergoing formal insolvency process.

However, the defense can have an adverse impact on the directors of the insolvent companies. The directors are likely to be prevented from relying on the safe harbor requirements if their firms do not meet staffs privileges or tax reporting commitments (Plessis & Mathiopoulos, 2016). These shows the weakness of the bill in covering sensitive events within the company. Likewise, the directors can engage in dishonesty practices to fall under the protection of the law. This includes presenting false financial records to the liquidator and colluding with the companys staff to provide wrong information about their business.

Another adverse impact concerns the uncertainty of employees and loss of key staff. During insolvency, the company may experience high turnover rate thus making the company unable to recover. Additionally, the defense can be rendered useless because it provides less optimal time for restructuring. The company may need more time to sell its assets to pay creditors, but the bill does not provide humble timelines (Purslowe, 2011).

Besides that, the bill cannot prevent the company from loss of brand recognition. Its primary purpose is giving an opportunity for recovering, but it cannot mitigate possible loss of firms brand due to potential insolvency. The bill also can be a temporary measure because some companies can fail to recover despite the directors efforts thus end up being liquidities (Purslowe, 2011).

Convincingly, the defense can generate more benefits to the directors and their company than impacting them negatively. In my opinion, this defense is appropriate in giving recovery chances to companies that are on the brink of being insolvent. This small effort can challenge the directors to develop cultural change within the firm that results in prosperous rehabilitation.



Chapple, L., & Routledge, J. (2015). External administration in corporate insolvency and reorganization: The insider alternative. Insolvency Law Journal, 23, 69-80.

Du Plessis, J. J., & Mathiopoulos, J. (2016). Defenses and Relief from Liability for Company Directors: Widening Protection to Stimulate Innovation.

PURSLOWE, R. (2011). Decisions in the twilight zone of insolvency: should directors be afforded a new safe harbor? University Of Notre Dame Australia Law Review, Vol. 13, 113-152. Retrieved from

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