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.     

Insolvency law: a comparative analysis of the preference tests in the Hong Kong Special Administrative Region (HKSAR) and Australia

This paper examines the unfair preference tests under corporate insolvency legislation in the Hong Kong Special Administrative Region (HKSAR) and Australia and undertakes a comparison of the law as it exists in relation to the tests in these jurisdictions. It suggests that the objective effects‐based test used in the Australian provisions may be more effective in terms of challenging unfair preferences than the subjective ‘desire’ test based on the actual or presumed intention of the debtor company used in HKSAR. Copyright © 2007 John Wiley & Sons, Ltd.     

论有限责任的实现及其法律适用界限

有限责任制度适用于公司、商业信托、合伙企业等各种商业组织形态.在这些企业中,有限责任通过构建商业组织和资产分割得到实现.组织化的重要功能在于通过建立公司或商业信托构建法律实体、促成资产分割并形成独立公司财产或独立信托财产从而实现商业组织所有人的有限责任.有限责任削弱了对债权人利益的保护,容易造成利益不均衡.在有限责任制度被滥用的情况下,应适用法人人格否认、实质合并规则等制度性措施予以纠正.同时,应谨慎对待有限责任在专业服务领域的适用,强调专家严格责任.     

Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

The European Union Draft Directive on a Preventive Restructuring Framework and Second Chance (the ‘Draft Directive’) provides rules for adopting reorganisation plans in order to avoid insolvency. The Draft Directive also provides rules on the related problem of interim financing. According to the Draft Directive, interim financing should be encouraged and not be made subject to claw back unless parties have committed fraud or acted in bad faith. The Draft Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Draft Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing reducing the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross‐collateralisation and aggressive loan‐to‐own strategies under the guise of interim financing. There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Draft Directive into a fully fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Draft Directive to cases of new security against new money necessary and used for the continuation of the business. Copyright © 2018 The Authors International Insolvency Review published by INSOL International and John Wiley & Sons Ltd.     

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.     

Paradigm shift from a liquidation culture to a corporate rescue culture in Malaysia: A legal review

The company law landscape in Malaysia has witnessed a significant change in its insolvency law with the adoption of two new corporate rescue mechanisms, the corporate voluntary arrangement and judicial management under the Companies Act 2016 (CA 2016), which has repealed the Companies Act 1965 (CA 1965). Previously, the insolvency laws under the CA 1965 were based on the traditional pro‐creditor laws of winding up and receivership, which embodied the liquidation culture. This article examines the transition of the insolvency laws in Malaysia from a liquidation culture under the CA 1965 to a corporate rescue culture under the CA 2016. It also reviews the necessary changes to the pro‐creditor laws, which are preserved under the CA 2016 in order to accommodate the pro‐debtor laws with the introduction of the corporate rescue mechanisms, which came into force on March 1, 2018. Through comparative and critical analysis of similar laws in the United Kingdom and Singapore, this article argues that while the corporate rescue mechanisms are regarded as pro‐debtor however the review reveals that the position of secured creditors are impeding its application and reforms ought to be considered.     

Tripping the Light Fantastic: A Comparative Analysis of the European Commission's Proposals for New and Interim Financing of Insolvent Businesses

The European Commission published a Draft Directive in November 2016, with the aim of ensuring that all Member States have in place an effective mechanism for dealing with viable, but financially distressed, businesses. The Draft Directive includes provisions designed to encourage financing for the debtor company, both interim financing to ‘keep the lights on’ for a brief period while the debtor negotiates with its creditors for a resolution to its financial distress, and, where possible, to finance implementation of a restructuring plan, called ‘new financing’ in the Draft Directive. Creating such a financing regime is a complex and difficult issue, as the law's intervention in this area often involves constraints on the rights of existing creditors, requiring that a careful balance is maintained between existing creditors' rights and the rights of the interim financier. This article examines the underlying policy rationale and benefits of having new and interim financing available to financially distressed debtor companies and discusses the risks involved. It examines the EU Commission's proposals in light of the experience of jurisdictions that have already tackled these issues, notably the USA and Canada, or have developed a market‐based solution to this problem, such as the UK. While the European Commission's wish to include such measures in its restructuring proposals is laudable, the measures as drafted raise concerns, particularly regarding risks associated with priority for the grantors of such finance. The authors suggest that there are four fundamental aspects of such financing on which the Directive could give guidance to Member States, namely, effective notice to pre‐filing creditors, thresholds for the debtor to qualify, a menu of relevant criteria to balance benefit and prejudice, and a role for the court in resolving disputes, ensuring fairness to stakeholders, and serving as an accountability check on interim financing arrangements, all aimed at maintaining the integrity of the insolvency process. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.     

Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements

There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-à-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.     

The Court's Power of Discretionary Relief in Actions Against Auditors

Since 1929, successive Companies Acts have empowered the courts to relieve a company auditor, wholly or partly, from liability for negligence having regard to all the circumstances of the case and if the auditor has acted ‘honestly and reasonably’. This power is now contained within section 727 of the Companies Act 1985. By reference to decided cases in the UK and in those Commonwealth countries where similar legislation exists this article reviews the manner in which the courts have interpreted this section and explores the reasons why they have rarely, if ever, chosen to use their powers under this section in favour of auditors.     

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.     

Grenzen der Auskunfts- und Belegpflicht in der D&O Versicherung

A large number of claims brought under German D&O insurance regard Insured vs. Insured cases, i.e. claims brought by the company against its own directors and officers (Executive Directors, Supervisory Board Members etc.). After notification of and examination by the insurer of such an insured event, the insurer will in most cases opt to grant the insured defence cover in order to fight off the claim. The insurer hereby expresses that it regards the claim of the company (= its own policyholder) against the board member (= the insured) to be without merit. This situation—where the policyholder is at the same time the damaged party—though typical under (German) D&O-policies is uncommon for liability insurance cover in general. It, thus, raises the issue as to the limits of the policyholder’s duty to disclose information. The scope of said obligation is not unlimited. It rather has to be ascertained pursuant to Sect. 31 VVG (German Insurance Contract Act), by taking into account the policyholder’s interests in commercial and industrial confidentiality and the burden of poof as provided by Sect. 93 para. 2 AktG (German Stock Companies Act). In case legal proceedings ensue between the company and the insured, and, as a consequence, the insurer exercises its obligation to conduct the case for the insured or the insurer joins the lawsuit on the side of the insured (by declaring a Third Party Notice [Streiverkündung]), the insurer clearly becomes an adversary to the company. Under such circumstances, the company is irrevocably released from its duty to disclose information.     

Corporate governance and board effectiveness

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.     

Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions

We find that firms that provide limited liability and indemnification for their directors enjoy higher credit ratings and lower yield spreads. We argue that such provisions insulate corporate directors from the discipline from potential litigation, and allow them to pursue their own interests by adopting low-risk, self-serving operating strategies, which coincidentally redound to the benefit of corporate bondholders. Our evidence further suggests that the reduction in the cost of debt may offset the costs of directorial shirking and suboptimal corporate policies occasioned by this insulation, which may explain why stockholders have little incentive to rescind these legal protections.     

Preference Transaction Avoidance in Ghana: Has the Liquidator's burden changed?

Financially distressed companies sometimes conceive plans to pay off certain creditors before petitioning the Court for winding up. This last‐minute payment referred to as a preference transaction puts the preferred creditor in a better position than the rest of the company's creditors because the distressed company may not have enough assets to satisfy everyone. Insolvency law frowns on such last‐minute transactions and provides the Liquidator with the power to avoid these transactions, to restore the asset to the company and distribute it to all the creditors. Preference avoidance forms an integral part of the corporate insolvency law in Ghana. These principles founded upon the common law of England are now provided for under the Bodies Corporate (Official) Liquidation Act 1963 (Act 180) of Ghana. This essay discusses preference avoidance under Ghanaian law. It also examines a recent judicial application of the law and finally suggest avenues for reform.     

Company duplication – plain fraud or a ‘poor man's’ bankruptcy? A case study in the financial distress of small businesses

Two possible solutions to corporate financial distress are traditionally considered: commencing a formal bankruptcy proceeding or arranging an out‐of‐court capital restructuring. Corporate bankruptcy scholarship has largely ignored a third solution occasionally undertaken by small businesses, that is, resorting to self‐help measures. The purpose of this paper is to start filling the gap using a unique case study. The paper describes and analyses an existing phenomenon among small firms in Israel experiencing financial distress – company duplication. A typical scenario unfolds as follows. An entrepreneur who controls the financially distressed Company A registers a new Company B in an attempt to avoid a complete shutdown of her creditors' disturbed business. The assets of Company A are transferred to Company B in what appears to be fraudulent conveyance. Company B serves as a vehicle through which the original business is kept running. If necessary, the entrepreneur will also register Company C and repeat the process. Israeli law regulates company duplication in an ambivalent manner. On the one hand, conventional wisdom considers company duplication to be tantamount to fraud against Company A's unaware creditors. Accordingly, company duplication has been recently denounced by the Israeli Supreme Court as an illegitimate way of conducting business. The Court held that notwithstanding the principle of limited liability, an entrepreneur resorting to company duplication is personally liable to pay any debt of Company A that was not serviced by it. On the other hand, company duplicators do not face criminal charges. To the extent that company duplication is practiced by insolvent entrepreneurs, deterrence is therefore suboptimal, as insolvent duplicators are not sanctioned at all. Against this backdrop, this paper advances two normative arguments. First, a more sympathetic explanation should be considered to account for company duplication. An entrepreneur resorting to company duplication might actually be arranging for a ‘home‐made’ bankruptcy proceeding (i.e. buying time which could help the business establish its viability and regenerate). According to this narrative, the duplication mimics the role of a formal bankruptcy stay on unsecured creditors' collection efforts, thus suggesting that company duplication serves as ‘a poor man's’ bankruptcy proceeding. Second, this new explanation of company duplication, combined with the current level of suboptimal deterrence, mandates a re‐evaluation of this business pattern to assess its relative efficacy. I argue that at least in the Israeli context because of its special features, company duplication should be tolerated with regard to small businesses, assuming that the entrepreneur is not defrauding creditors or attempting to rescue a business that has failed due to economic rather than merely financial factors. To that end, company duplicators should be held personally liable to debts of the duplicated companies and be pursued with criminal sanctions only selectively, as explained in the paper. Copyright © 2011 John Wiley & Sons, Ltd.     

Annual reporting disclosures 1970-90: an exemplification

This case study examines the annual report disclosures in a UK listed company, Bulmers, from 1970 to 1990. While mandatory disclosure increased sharply, primarily because of the 1981 Companies Act, the even steeper increase in voluntary disclosure was part of a wide-ranging package of measures which Bulmers' chairman, Peter Prior, introduced to reflect a new corporate philosophy. In 1974, Bulmers provided a statement of company objectives, the first known British example, a year before this practice was recommended in The Corporate Report (Accounting Standards Steering Committee, 1975). In 1982, Esmond Bulmer MP introduced a Private Member's Bill on employee consultation and information, the basic aims of which were eventually enshrined in the 1985 Companies Act.     

Smoke and mirrors: Corporate social responsibility and tax avoidance

The bourgeoning corporate social responsibility literature has paid little attention to organised tax avoidance by companies even though it has real consequences for the life chances of millions of people. Companies legitimise their social credentials by making promises of responsible and ethical conduct, but organisational culture and practices have not necessarily been aligned with publicly espoused claims. This paper draws attention to the gaps between corporate talk, decisions and action, or what may be characterised as organised hypocrisy. Its persistence can become a liability and threaten the welfare of the company, its employees and its executives. The paper provides examples to show how companies, including major accountancy firms, make promises of responsible conduct, but indulge in tax avoidance and evasion. It also shows that the exposure of contradictions between talk and action has yielded negative outcomes.     

Statement of the Financial Economists Roundtable on the International Competitiveness of U.S. Capital Markets

The Committee on Capital Markets Regulation issued an Interim Report (known as the “Paulson Report”) near the end of 2006 that concluded that the U.S. “is losing its leading competitive position as compared to stock markets and financial centers abroad.” This report was quickly followed by a study, which reached similar conclusions, that was commissioned by New York Mayor Michael Bloomberg and Senator Charles Schumer and prepared by McKinsey & Co. At its July 2007 annual meeting, the Financial Economists Roundtable (FER) — a group of senior financial economists at universities and other organizations recognized as having made significant contributions to the finance literature—discussed the issues raised by the Report and decided to publish its own report. The report makes the following four policy recommendations:

• 1 Securities class action suits —Abolish enterprise liability under rule 10b‐5 in situations arising out of security purchases and sales in the secondary trading market among outside shareholders, while retaining managerial and firm liability where the company itself or its insiders (officers and directors) transact to their own benefit. Imposing massive liability on a company that is not a party to the securities transactions and does not benefit from the fraud does not serve a deterrence function since it is the continuing shareholders of the corporation who bear the burden of what the company must pay if found guilty, either directly or indirectly through insurance premiums.
• 2 Shareholder rights—Require all corporations to obtain shareholder approval to adopt a poison pill, regardless of whether a company has a staggered board. This requirement would conform to the broad principle that the board of any company should not be able to deny its shareholders the opportunity to decide on the merits of a takeover bid, and it would help restore the market for corporate control as an effective disciplinary mechanism for poorly performing boards and managers.
• 3 Compliance costs associated with SOX §404—Adopt a statutory amendment that makes it optional for a company to adopt the §404 procedures for a management assessment and auditor attestation of the effectiveness of its internal controls, with the requirement that if the company chooses not to comply it must explain why in its financial statements. Thus, in effect, the FER effectively recommends that the market be allowed to determine the value of §404 compliance. If a company chooses not to comply, the market will assess its explanation for non‐compliance and will value the company accordingly.
• 4 Maintaining open markets—Allow both foreign and U.S. firms to choose to report in conformity with either IFRS or U.S. GAAP. The FER recognizes both IFRS and U.S. GAAP as high‐quality accounting standards that provide reasonable foundations for financial reporting for investors. Allowing both foreign and U.S. firms to adopt whichever of these standards they believe to be the most cost‐effective provides an opportunity for the market and investors themselves to sort out which reporting standard best serves their interests.

     

‘The Re Tea Corporation principle and junior creditors’ rights to participate in a scheme of arrangement – a view from Singapore'

This paper examines the application of the principle derived from Re Tea Corporation's case in recent schemes of arrangement to break negotiation deadlocks between senior and junior creditors of a financially distressed company. This paper argues against an overly technical application of the principle in Re Tea Corporation's case which might work injustice towards junior creditors by effectively shutting them out of a restructuring. This paper further explores how the holdout problem, which led to the formulation of the Re Tea Corporation principle in the first place, could be addressed while balancing the competing interests of junior claimants in a scheme of arrangement. Copyright © 2011 John Wiley & Sons, Ltd.     

The Informational Effect of Corporate Lobbying Against Proposed Accounting Standards

Accounting standard setting has been described as a highly political process. Different interest groups are often quite ready to criticize any proposed accounting standard and lobby the accounting standard setting body. This study explores the possibility that certain information might be revealed through corporate lobbying behavior. A game-theoretic model is formulated to examine the implications of a proposed accounting standard which, if passed, would require the financial statement recording of some previously undisclosed liabilities. In this model, management has incentive to lobby against the standard and prevent the mandatory reporting of the liabilities. Lobbying against the standard, however, may itself reveal to the market information about the liabilities. Results of the equilibrium analysis show that, because of this informational effect, a company may choose not to lobby even though the company may have a high liability and can be adversely affected by the proposed standard. On the other hand, a company may avoid revealing its liability level if it can adopt the "always-lobby" strategy. Furthermore, a company may not have to lobby at all if it can "free-ride" on other companies' lobbying effort. Companies may even be able to enjoy "free-riding" at least some of the time if each company can share the responsibilities and lobby on a probabilistic and what otherwise may seem like a random basis.