As part of the national innovation and science agenda, the Australian Government has proposed reforms to insolvency laws designed to encourage innovation and entrepreneurial behaviour, while still protecting creditors.
The Government’s National Innovation Statement, which outlines the proposed reforms, was issued on 7 December 2015, the same day that the Productivity Commission’s Inquiry report into Business Set-up, Transfer and Closure was also released.
The PC’s report is a companion piece to the Government’s proposed reforms, although at this stage only 3 of the 15 recommendations in the PC report for insolvency reforms are mentioned in the Innovation Statement.
Reducing personal insolvency to one year
This proposal is to reduce the current default bankruptcy period from three years to one year.
In particular, the proposal is that where no offence has occurred, a bankrupt is automatically discharged and restrictions relating to overseas travel, holding an office under the Corporations Act 2001 (Cth), employment within certain professions and access to personal finance are lifted after one year.
The purpose of this reform is to encourage a vibrant start-up economy, move away from blaming entrepreneurs as failures and reducing the stigma attached to personal insolvency.
The reforms provide a process for longer periods of bankruptcy where fraud or misconduct is involved.
Safe harbour for directors during restructuring
The Innovation Statement proposes a safe harbour defence for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company.
The directors would need to act according to the advice of the restructuring advisor and the safe harbour would continue only for so long as there were reasonable prospects of saving the business.
This reform is aimed at encouraging businesses to take healthy risks but with expert advice.
Nullifying ipso facto contract clauses
This third proposal is to make ‘ipso facto’ clauses, which allow contracts to be terminated solely because of an insolvency event, unenforceable if a company is undertaking a restructure.
The purpose of this reform is to allow a better opportunity for businesses to trade through financially challenging periods without key contracts being terminated.
Generally the proposed reforms have been positively received, particularly as major reform of Australia’s insolvency regime has not occurred for over 20 years.
It is expected that the Government will release a proposal paper in the first half of 2016, with legislation to be introduced and passed in mid-2017.
March 2016