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

• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/iir.1349

RESEARCH ARTICLE

Insolvency law reform in Australia and Singapore:

Directors' liability for insolvent trading and

wrongful trading

Stacey Steele | Ian Ramsay | Miranda Webster

Melbourne Law School, University of

Melbourne, ParkvilleVic, 3010, Australia

Correspondence

Stacey Steele, Melbourne Law School,

University of Melbourne, Parkville, Vic,

3010, Australia.

Email: s.steele@unimelb.edu.au

Abstract

This article compares reforms to directors' liability for

insolvent trading in Singapore and in Australia. We ana-

lyse 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 coun-

tries therefore represents an interesting case study in how

countries differ in their approaches to balancing the com-

peting interests evident in laws that impose personal liabil-

ity 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 liabil-

ity. Singapore's omnibus insolvency law reforms of

2018–19 include amendments to update Singapore's fraud-

ulent and insolvent trading provisions by introducing a

concept of “wrongful trading.”The article finds that there

are some areas of convergence between these two jurisdic-

tions when it comes to debates about such provisions but

concludes that the different contemporary legislative his-

tories 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,

Received: 21 July 2019 Revised: 18 September 2019 Accepted: 24 October 2019

DOI: 10.1002/iir.1349

© 2019 INSOL International and John Wiley & Sons, Ltd

Int Insolv Rev. 2019;28:363–391. wileyonlinelibrary.com/journal/iir 363

and encouraging entrepreneurship and innovation; how-

ever, this comparison suggests that the weight that

reformers place on creditor protection compared with the

concern that excessive personal liability can make direc-

tors unduly risk-averse is influenced by their existing leg-

islative 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 pro-

vide a more creditor-friendly regime.

KEYWORDS

Australia, directors' liability, insolvency, insolvent trading, safe

harbour, Singapore, wrongful trading

1|INTRODUCTION

This article compares reforms to director liability for misconduct in an insolvency context by analysing

the policy considerations and content of reforms to the laws imposing liability for insolvent trading in

Australia and Singapore.

1

The terminology used to describe a director's liability depends on the scope

of the applicable provisions and is known, for example, as “insolvent trading”in Australia and when

the reforms set out in the Insolvency, Restructuring and Dissolution Act 2018 (Singapore) (“IRDA”)

become effective, “wrongful trading”in Singapore.

2

This type of personal liability is a statutory excep-

tion to the general principle that corporate debts are owed by the company as a separate legal entity.

3

The liability of directors and other company officers for the debts of companies is a relatively recent

phenomenon. Fraudulent trading provisions were introduced in the U.K. Companies Act 1929,

4

fol-

lowing recommendations by the Company Law Amendment Committee led by Mr Wilfrid Greene KC

(known as the Greene Committee).

5

The fraudulent trading laws, which still exist in certain jurisdic-

tions such as Singapore, provided for liability if, in the course of winding-up the company, it appeared

that a person was “knowingly a party to”the carrying on of the business of the company with intent to

defraud creditors or for any fraudulent purpose.

6

By contrast, insolvent trading does not require fraudu-

lent conduct or dishonesty—the focus of insolvent trading provisions is the timing of the incurrence of

a debt when the company is insolvent and the prospects of repayment.

1

In this article, “insolvent trading”is used as the generic term to describe the conduct that these kinds of legislative provisions

target, and “wrongful trading”is used when specifically referring to the legislative provisions that use that term such as the

new Singaporean provisions or U.K. law. Other variations include “reckless trading”and “fraudulent trading,”depending on

the elements that make up the liability.

2

The IRDA was passed by Parliament in October 2018 and is expected to become effective in 2019.

3

Jason Harris, “Director Liability for Insolvent Trading: Is the Cure Worse than the Disease?”(2009) 23 Australian Journal of

Corporate Law 266, 267.

4

Section 275, Companies Act 1929 (19 & 20 Geo 5, c 23).

5

Company Law Amendment Committee (Great Britain), Company Law Amendment Committee: 1925–26 Report (Cmnd 2657,

1926), 28–30, [61]–[62].

6

See, e.g., s 238, Insolvency, Restructuring and Dissolution Act 2018 (Singapore); s 213, Insolvency Act 1986 (United

Kingdom).

STEELE ET AL.

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