The corporate regulator has lately conceded the attachment of personal liability to company directors to have become excessively arduous and uncommercial. These remarks particularly accord with and underscore recent hints proffered both by law reformers and judges that it is necessary to reassess the policy balance struck by the imposition of personal liability on directors under the insolvent trading regime.
In this context the great import of the decision of the New South Wales Supreme Court in Hall v Poolman (hereafter ‘Poolman’) cannot be overstated. The judgment of Palmer J treats, inter alia, several live and controversial issues going to the heart of company law and insolvency jurisprudence. For present purposes, the salient issue was whether the discretionary power to forgive directors who act honestly and reasonably, contained in s 1318 of the Corporations Act 2001 (Cth), ought to be exercised to relieve directors of personal liability flowing from breach of the duty to prevent insolvent trading. Answering this question affirmatively, Palmer J warned that where a director’s exercise of commercial judgment in attempting to save a company from illiquidity turns out to be erroneous and the company fails, personal liability for insolvent trading ought not to attach. In so emphasising that the court must ever remain cognisant of commercial realities, Palmer J suggested that the s 1318 discretion to forgive provided an ideal mechanism for readdressing this policy deficiency stemming from the stringency of the insolvent trading regime.
This note argues that Poolman provides a sound clarification and appropriate extension of the application of the s 1318 dispensatory power with respect to the prohibition against insolvent trading. In doing so it is submitted that the sympathetic and generous approach adopted by Palmer J: firstly, exhibits a willingness to embrace s 1318 as a de facto business judgment rule; secondly, is consistent with an ever-increasing corpus of judicial and public sentiment emphasising the centrality of entrepreneurialism in corporate law and in doing so gives long overdue effect to longstanding case authorities, and; finally, represents the best means of reconciling competing policy objectives in the area of insolvent trading.
Poolman concerned the financial difficulties encountered by certain companies within the Reynolds Group, which, inter alia, carried on business operating vineyards and a winery and marketing and selling wine. The principal source of the relevant companies’ financial distress was a $17.4M tax liability claimed by the Commissioner of taxation on 30 June 2002 which precluded the raising of much needed additional capital. Notwithstanding dispute of the tax liability, significant and lengthy attempts by the companies’ directors to negotiate with the Commissioner ultimately failed on 31 July 2003 with the result that the tax claim was due and payable when it had issued, rendering the companies technically insolvent.
The plaintiff liquidators appointed to the relevant companies thus instituted proceedings against the Chairman of the companies Mr Malcolm Irving (Hereafter ‘Irving’) alleging that, from at least 1 October 2002 until the time of their appointment as administrators on 4 August 2003, during which time the companies were challenging the tax liability, Irving had incurred debts on behalf of the company by allowing it to continue to trade when the company was effectively insolvent and in doing so contravened his duty to prevent insolvent trading pursuant to s 588G.
Irving unsuccessfully sought to rely on various defences under s 588H and, more to the point, alternatively asked that the court exercise its discretion under s 1318 to forgive his breach and excuse him from personal liability...