Question 5

Do you think the changes to Division 3 will have an effect on the number of voluntary
insolvencies in Australia in the future? Why or why not?

The changes in division 3 encourage the directors who acted in good faith and for the interest of
the company to take appropriate course of actions to improve the financial health of the
company. The changes provide the chance to the directors who want to turn around their
company. Thus, this may lead to decrease in the number of voluntary insolvencies in Australia.
However, the number of such voluntary insolvencies will not decrease drastically because of the
legal proceedings which require directors to prove themselves that they deserve the safe harbor
defence. We need more effective laws in place in order to decrease the voluntary insolvencies in
Australia. The reasons that some directors may want to take the course of voluntary insolvency
are as follows:

1) It is upon the director of the company to prove that he/she deserves the defence against trading
while insolvent. Depending upon the complexity of the businesses and the legal intricacies this
could be difficult for the directors to prove.

2) Directors are often not sure whether the course of action taken by them will result into the
better outcome for the company. This can induce the directors to immediately appoint the
administrator or the liquidator. The appointment of the liquidator means the company is opting
the voluntary insolvency. The company has very dynamic and changing circumstances when its
financial health is deteriorating. Under such circumstance the director must keep on taking the
series of decisions that will lead the company to the better outcome. The failure of the director
may devoid him of the defence. This may induce the directors to choose the voluntary
insolvency.

3) A director will never breach the section 588G if the administrator or liquidator is appointed
where the company is at risk of insolvent trading. However, the director is exposed of breaching
the s588G if they choose to rely on the safe harbor defence. Hence, risk adverse directors may
choose the option of voluntary insolvency.
4) The director of the company will only know if the safe harbor defence applies when the case
is judged by the court. Hence, the risk adverse directors would choose the safe option of
voluntary insolvency.