Insolvent trading and voluntary administration in Australia: economic winners and losers?

Australian directors who incur debts while their companies are insolvent can be pursued by the corporate regulator for compensation when their companies fail. Under the Australian insolvent trading laws, directors no longer experience ‘true’ limited liability, and as expected, they adjust their behaviour as a result. Identifying director's rational behaviour in an insolvent trading world is difficult as there are no formal economic models of director decision-making under Australian current corporate law. In this paper, we develop such a model primarily for private companies. We incorporate the threat of insolvent trading as well as director's tactical use of voluntary administration to avoid insolvent trading litigation. We show that neither a combination of insolvent trading or voluntary administration can simultaneously ensure creditors-best outcomes, eliminate insolvent trading and reduce director underinvestment.     

Insolvency law reform in Australia and Singapore: Directors' liability for insolvent trading and wrongful trading

This article compares reforms to directors' liability for insolvent trading in Singapore and in Australia. We analyse the law in these two countries because they are important Asia‐Pacific trading partners and their laws were originally largely the same—Singapore's law on insolvent trading reflected the law in Australia from the 1960s. However, the law in the two countries has now diverged substantially. The comparison of these two countries therefore represents an interesting case study in how countries differ in their approaches to balancing the competing interests evident in laws that impose personal liability on company directors for insolvent trading. Reform of the prohibition against insolvent trading was a focus of Australia's insolvency law reforms in 2017, which led to the introduction of a safe harbour for directors from liability. Singapore's omnibus insolvency law reforms of 2018–19 include amendments to update Singapore's fraudulent and insolvent trading provisions by introducing a concept of “wrongful trading.” The article finds that there are some areas of convergence between these two jurisdictions when it comes to debates about such provisions but concludes that the different contemporary legislative histories in Australia and Singapore have affected their approaches to reform. Reformers in both jurisdictions have attempted to find an appropriate balance between protecting creditors, discouraging director misconduct, and encouraging entrepreneurship and innovation; however, this comparison suggests that the weight that reformers place on creditor protection compared with the concern that excessive personal liability can make directors unduly risk‐averse is influenced by their existing legislative framework and experience of those laws. Although Australia has shifted away from a strict focus on creditor protection, to give directors more opportunities to engage in restructuring, Singapore's amendments may provide a more creditor‐friendly regime.     

Corporate assets as a trust: for whom are corporate officers trustees in insolvency? the role of incentives in maintaining the trust

Uncertainty is a constant theme when corporations are in financial distress. Yet any successful restructuring of an insolvent corporation requires numerous stakeholders, including creditors, employees and suppliers, repose some degree of trust in those corporate officers who are trying to continue to operate the firm while restructuring it into a viable entity. This article looks at the issue of the positive and negative incentives that can be generated for corporate officers and directors from both their continuing control of corporate assets and their potential personal liability arising from corporate activity both before and after the corporation became insolvent. The potential role these incentives can play in providing a basis for the trust needed to meet the other governance challenges that arise in a restructuring is reviewed in the context of recent developments in Canada concerning the duties of corporate directors to creditors during insolvency. Also reviewed is the role of directors' insurance and indemnification in altering the incentives' effects on directors' behavior. Finally a critical appraisal is given of the present legal regime's provision for compromise of claims against corporate officers during restructuring, as well as the proposal to amend the law to allow complete exoneration of corporate directors from certain liabilities on insolvency. The article urges caution in altering the effects of incentives that may create the necessary basis for trust in the distressed corporation's officers amongst those stakeholders whose co‐operation is crucial to restructuring. Copyright © 2003 John Wiley & Sons, Ltd.     

Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil

This article examines the liability of parent corporations within company groups in Australia, to determine whether the law needs to be reformed. It gives an overview of the theory behind limited liability and situations in which piercing the corporate veil is arguably justified. It then considers whether the veil should be pierced to impose liability on parent companies. It makes the case that fault should be the basis of liability, and it looks at examples of veil‐piercing laws overseas to determine whether any of them might provide an appropriate template for liability. Recent Australian initiatives are considered before making suggestions for reform.     

ICT deployment and resource-based power in multinational enterprise futures

Applying a resource-dependency perspective to intra-multinational enterprise (MNE) power [55] and [56], this paper examines the effect of the deployment of advanced ICT and particularly the implementation of enterprise resource planning (ERP) systems. Although subsidiaries in the multinational do not have authority-based or ‘structural’ power with respect to key strategic decisions [6] and [16], they may have ‘resource-based’ power in the form of knowledge and capabilities that is of value to the multinational as a whole. Business network analysis highlights the ‘invisibility’ of the external networks (often in the host country) to the upper echelons in the multinational through which valuable subsidiary knowledge and capabilities develop. It points out that this ‘invisibility’ undermines the headquarters’ ability to control the subsidiary [3], [28], [36], [44], [70] and [74]. In this paper we argue that the deployment of ERP undermines the resource base of subsidiary power and thus helps to restore greater central authority in the MNE. The paper reports findings from studies in twelve MNEs which have implemented ERP and points out that from the perspective of subsidiary managers a key effect of ERP deployment is the reduction in their autonomy. This may have significant adverse implications for the futures of the MNE as a federative organizational form and the legitimacy of MNE operations abroad.     

Reconsidering the Shareholder's Role in Corporate Reorganisations under Insolvency Law

A corporate reorganisation under insolvency law is commonly achieved by virtue of a reorganisation plan that provides for the distribution and sacrifice of value among all stakeholders in an insolvent company. Although the creditors' right to vote on such plans and to participate in the wealth distribution according to such plans is universally accepted, the role of old equity in a corporate reorganisation remains a topic that jurisdictions all over the world define very differently. This article first explores possible approaches to shareholders' treatment under insolvency law and supports their inclusion in insolvency proceedings that pursue corporate reorganisations. It then argues that equity interest should not solely be treated according to its economic value and consequently that no absolute priority rule should be applied against them as such treatment would ignore the fundamental difference between liquidation and reorganisation. Finally, it proposes a new cram‐down rule for a class of equity holders. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd.     

International Mergers and Acquisitions Laws,the Market for Corporate Control,and Accounting Conservatism

Exploiting the staggered enactment of country‐level mergers and acquisitions (M&A) law as an exogenous increase in corporate takeover threat, this paper examines how a disciplinary market for corporate control affects accounting conservatism. Following M&A law adoption, we find increased accounting conservatism, with more pronounced effects in countries with weak shareholder protection and in those experiencing larger growth in takeover activity. Further analysis reveals that elevated takeover threats increase conservatism through changes in capital structure and investment decisions as well as improvements in board monitoring. Our findings highlight the importance of the market for corporate control in shaping financial‐reporting outcome.     

美日跨国公司在华投资企业治理机制的特征及借鉴

跨国公司治理机制的形成是建立在母公司治理机制不断完善的基础之上的,其有效性包括了各子公司在内的整个企业集团治理机制的效率。跨国公司治理机制的实质就是母子公司治理机制及二者之间的内在联系。中国跨国公司的竞争力与发达国家的跨国公司相比存在很大差距,其根本原因就是公司治理水平的差异。通过对美国、日本跨国公司在华投资企业治理机制的比较,可以看出文化要素对跨国公司治理机制的独特作用,这对中国跨国公司完善治理机制具有重要借鉴意义。     

Intersections of law and accountancy: Unlimited auditor liability in the United Kingdom

In recent years, considerable pressure has grown within the British auditing industry for limitation of liability arising from negligent mis-statements in audit reports. Under British company law, auditors are forbidden from contracting with companies for their liability to be restricted. This legal provision was introduced in the Companies Act 1929 as a byproduct of legislation relating to directors' liability. The paper explores the background to this legal provision, observing that auditor liability cannot be viewed as a self-contained matter of interest only to a limited community. Attitudes to auditor liability have been shaped against a background of changes in the law of negligence, some, but by no means all, arising from cases involving auditors. Moreover, changing concepts of the position of the auditor within corporate governance structures have at different times encouraged and discouraged the assimilation of the legal treatments of auditors and directors. These concepts themselves reflect differing notions of what actually constitutes the “company”: a collectivity of shareholders or a separate entity controlled by directors. These notions emerged against a background of corporate failure and the need to allocate losses among various parties with different degrees of culpability for failure. However, legal developments do not account by themselves for changing attitudes within the auditing industry towards unlimited liability; acceptance of full responsibility for one's statements, adopted as a badge of professional status, has more recently been seen as inhibiting the commercial development of British auditing.     

Taxation and skills investment in frictional labor markets

This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.     

Making company directors liable: a comparative analysis of wrongful trading in the United Kingdom and insolvent trading in Australia

The separate legal entity doctrine in corporate law means that directors are not generally liable for their company's liabilities. However, there have been actions taken by governments and courts to make directors liable in certain cases. This article examines and compares legislative provisions in the United Kingdom and Australia to make directors liable for the debts of their companies. These provisions, namely section 214 of the UK's Insolvency Act 1986 (wrongful trading) and section 588G of the Australian Corporations Act 2001 (insolvent trading), had the same starting point, but now differ substantially, even though, arguably, they retain very similar objectives. The article investigates: the reasons for these differences; the criteria on which each of the provisions focus; and the ramifications for the different approaches. It also endeavours to evaluate the strengths and weaknesses of the respective approaches adopted in each country. Copyright © 2005 John Wiley & Sons, Ltd.     

Claims against negligent or fraudulent directors: proposed amendments to South African legislation

Numerous jurisdictions provide for statutory civil liability of directors should they make themselves guilty of managing the business of a company in a reckless, wrongful or fraudulent manner or engage in insolvent trading. Such provisions can play an important role in protecting the interests of corporate creditors, provided that they are properly formulated. This contribution attempts to determine whether the interests of corporate creditors are adequately protected in terms of such provisions. In South Africa, directors' civil and criminal liability for reckless or fraudulent trading is currently provided for in terms of section 424 of the South African Companies Act. Civil liability of those engaged in knowingly taking part in managing the business of the company fraudulently or recklessly is provided for in terms of subsection (1). However, an analysis of case law on the interpretation of section 424(1) reveals that there are numerous uncertainties regarding the application of this provision. Similar provisions in other jurisdictions also display a number of shortcomings. South African company law has just undergone an extensive review, however, and a Draft Companies Bill of 5 February 2007 was recently published for public comment. The liability of directors for reckless or fraudulent trading is provided for in terms of the proposed section 93(2)(b) of the Draft Companies Bill. A comparison between section 424(1) and section 93(2)(b) indicates that some of the uncertainties that exist in terms of section 424(1) may be resolved by the new provision. Unfortunately, the proposed section 93(2)(b) raises some of its own questions and would furthermore seem to offer more limited protection than section 424(1) in certain respects. This unfortunate occurrence will detract from the protection that provisions such as these could afford to the interests of corporate creditors and it is submitted that such provisions should be drafted with great care. Copyright © 2007 John Wiley & Sons, Ltd.     

Does the common law power to grant cross‐border insolvency assistance apply to an insolvency winding‐up that is voluntary? The reaction to Singularis from Singapore and Hong Kong

In many common law jurisdictions, the common law power of courts to grant assistance in respect of foreign insolvency proceedings exists independently of statute. The nature of the power, however, continues to generate debate. Obiter dicta of the Privy Council suggests that no assistance is available where the foreign proceeding is a voluntary winding‐up. This article evaluates the position by reference to Singapore and Hong Kong decisions and concludes that a refusal to grant assistance in circumstances involving an insolvent voluntary winding‐up is inconsistent with the principle of modified universalism and that a broader recognition test should be adopted.     

Reconsidering Procedural Consolidation for Multinational Corporate Groups in the Context of the Recast European Insolvency Regulation

Procedural consolidation, as a solution to the rescue of insolvent multinational corporate groups (‘MCGs’), is said to be able to preserve group value for creditors. This article explores the desirability of procedural consolidation in the EU in the light of theories of corporate rescue law, cross‐border insolvency law, multinational enterprises and relevant EU cases with reference to the European Insolvency Regulation. It argues that, based on current cross‐border insolvency rules in the EU, there is an inherent difficulty for procedural consolidation in balancing the goal of preservation of group value and the goal of certainty. The article also considers the new ‘group procedural coordination proceedings’ offered by the Recast European Insolvency Regulation and argues that it may help to supplement the gap left by the procedural consolidation in the EU. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.     

税率锚定效应与企业投资决策

已有文献证实了高管过度自信等非理性因素对企业投资决策的影响,但尚未有文献研究锚定心理在投资决策中的作用。税收政策连续性不足会使得企业实际税率充满不确定性,高管在预测未来实际税率时很可能会非理性地锚定当期的高税率,进而产生税率锚定行为。本文研究这种非理性的税率锚定行为对企业投资决策的影响,结果发现:企业投资决策中存在显著的税率锚定行为,对高税率的锚定显著降低了企业未来的投资支出,且内在锚效应(纵向对比)强于外在锚效应(横向对比)。进一步地,我们发现经验更丰富的高管有助于缓解投资中的税率锚定效应,但更大的税率波动性加剧了这种效应,最终降低了公司业绩和价值。本文研究表明,控制投资中的税率锚定行为,有利于提高投资效率和企业价值,同时也表明保持宏观税收政策连续性有利于促进企业健康可持续发展。     

Derivatives Use, Corporate Governance, and Legislative Change: An Empirical Analysis of New Zealand Listed Companies

Abstract:   This paper examines if board composition has any systematic bearing on derivatives usage by New Zealand listed companies. We also test if derivative usage changed following the introduction of the new 1993 Companies Act. The Act raised expectations of directors' fiduciary responsibilities and the perceived risk of liability on outside directors for poor investment decisions. Using a dataset of listed New Zealand companies in 1994 and 1997, we find companies with higher growth opportunities and a greater proportion of outside directors were less likely to use financial derivatives following the introduction of the new Act. Our results supplement the US‐based literature on derivatives usage by illustrating that internal governance mechanisms can play a role in corporate derivatives policy, and that the legislative and regulatory environment may affect this role.     

An Analysis of Potential Legal Liability Incurred Through Audit Expert Systems

The introduction of expert systems technology into the audit environment has opened a new avenue of auditor legal liability. This paper examines the potential impact expert systems will have on auditor liability. The presentation of this new avenue of auditors' legal liability explores both the potential for litigation under failure of auditor/expert system collaboration to yield prudent decisions and the failure to use an available expert system. The risks evolving from failure to use an available expert system include the possibility that the system could be used against the auditor in the courtroom. While case law will ultimately determine the bounds of this liability, this paper acquaints the reader with the important legal issues involved and the varied outcomes that could emerge. It should also be noted that while the specific example presented in this paper relates to the audit profession, the legal concepts are of equivalent concern to other professions enduring broad implementation of expert systems.     

Capping auditor liability: The German experience

There are serious concerns in some Western countries that methods should be found to resolve what is commonly referred to as the auditing profession's liability crisis. A number of legislative-based proposals to limit auditors' liability have been suggested. However, anxiety has been voiced relating to the inherent uncertainties attached to such apparently untested reforms. In this respect it is interesting to note that for more than sixty years the German auditing profession has operated within a regulatory environment in which liability is restricted by a legislatively sanctioned universal cap. We document the German experience and consider whether their form of liability restricting mechanism can provide a contribution to the debate concerning the efficacy of proposals to reform auditor liability elsewhere. We draw attention to the fact that at this time when the auditing professions in other countries are campaigning for reductions in liability exposure, it is interesting to observe that the German auditing profession has recently campaigned for increases in exposure. We use this and related events to suggest that the German experience illustrates that it is unlikely that the liability crisis can be resolved by simply changing the legal basis upon which financial penalties for auditors are assessed. We argue that a necessary precursor to a redesign of penalty mechanisms is a need to obtain measured consensus concerning identification of the constituency of claimants that should have rights to pursue auditors in the courts. Such an identification process needs to be firmly based within a model of corporate governance which reflects what can reasonably be expected from and provided by the auditing profession. In this respect we support the application of the intermediate form of corporate governance which until relatively recently characterized the German system. Within this system auditors were ascribed a less influential role than was envisaged in Anglo-American traditions. This arose since they acted principally as information agents to an influential supervisory board rather than as shareholders' representatives.     

Voluntary forward-looking statements driven by corporate governance and their value relevance

This paper examines the impact of corporate governance on the level of voluntary disclosures of forward-looking statements in the narrative sections of annual reports. It also examines whether the forward-looking statements that are driven by governance are informative about future earnings. This analysis is drawn from a large-scale sample of UK FTSE All-Share companies for financial years ending within the period January 1996–December 2007. We find that corporate governance influences companies’ decisions to voluntarily disclose these statements. The main drivers are directors’ ownership, board size, board composition, and the duality of the CEO’s role. These results suggest that better corporate governance improves reporting practice. We further find that the forward-looking statements of well governed firms improve the stock market’s ability to anticipate future earnings. Our findings have important implications for policy makers and regulators because they confirm that the effectiveness of corporate governance in the practice of disclosure is a function of certain characteristics and that the voluntary forward-looking statements of well governed firms contain value relevant information for investors.     

The Effect of Corporate Status on External Audit Fees: Evidence From the UK

Abstract:  This paper simultaneously examines, for the first time, the determinants of external audit fees of UK companies drawn from the quoted sector (Main Market, the Alternative Investment Market and Ofex), and the unquoted sector (public and private limited companies). The paper also provides new evidence on the effects of corporate failure and the persistence of the big four and mid-tier auditor premiums across the public and private corporate sectors. After controlling for firm size, audit risk and complexity, we find that quoted and unquoted public limited companies have significantly higher audit fees than their private limited counterparts. Our estimates imply that relative premiums for market/corporate form are as follows: Main Market over AIM, 6.8%; AIM over Ofex, 19.5%; Ofex over unquoted plc, 15.5%; and unquoted plc over private, 16.7%. However, despite indications in prior US research to the contrary, we find no evidence that insolvent firms that failed were charged higher audit fees in the year preceding failure. A positive relationship is also found between audit and consultancy fees – a result that persists using an instrumental variables approach to control for endogeneity.