Why do companies fail?

On 24 November 2016, the Reserve Bank of Australia (RBA) released a Research Discussion Paper titled Why Do Companies Fail?

Interestingly, the RBA found that the threat of insolvent trading (under the current insolvency law regime) may encourage company directors to seek the protection of voluntary administration rather than restructuring the company.

Under the current insolvency law regime, a director who allows a company to trade whilst insolvent may be found personally liability for allowing debts to be incurred by the company whilst it is insolvent. The paper observes that this has encouraged a culture of risk aversion by directors, resulting in companies being placed into voluntary administration in circumstances where the companies are only experiencing temporary financial distress, notwithstanding that there may be good long term growth prospects for the company.

It will be interesting to see the impact of the proposed “safe harbour” reforms on the statistics contained in the RBA’s Research Discussion Paper, as the proposed reforms will in certain circumstances reduce the liability of directors in insolvent trading claims where they have engaged a restructuring advisor to develop a turnaround plan for the company.

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