Last week, on 28 March 2017, the Treasury released draft legislation to amend the Corporations Act 2001 to reform Australia’s insolvency laws as part of its National Innovation and Science Agenda (NISA).

The aim of the reform is “to promote a culture of entrepreneurship and innovation and help reduce the stigma associated with business failure.”

The insolvency industry has been awaiting these reforms.

There are two key areas of reform

1. Safe harbour

A safe harbour or defence for company directors from personal liability for insolvent trading if the company is undertaking a restructure in certain circumstances:

  • The director(s) take a course of action reasonably likely to lead to a better outcome for their company and the company’s creditors.
  • Protection extends only to debts incurred in connection with that course of action.

Courses of action taken by the director(s) that may be considered reasonable courses of action likely to lead to a better outcome include:

  • obtaining pertinent advice from an appropriately qualified entity (no information has yet been provided on the qualifications required for such an advisor).
  • maintaining the appropriate financial records.
  • taking the appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay its debts.

The draft legislation suggests that the test for safe harbour protection is fluid and will require consideration of the specific and evolving circumstances of the company.

However, the key to the defence will surely be early, or at least timely, action by the director(s) when indicators of financial distress arise, such action being tailored to the company’s specific circumstances.

2. Ipso facto

Amendments to make ‘ipso facto’ clauses unenforceable if the company has entered into a formal insolvency process.

‘Ipso facto’ clauses allow contracts to be terminated solely due to an insolvency event.

With regard to the draft legislation, note that:

  • It attempts to restrict such clauses only in the event of Part 5.1 Schemes of Arrangement and Part 5.3A Voluntary Administrations (not Liquidations).
  • Certain types of contracts and contractual rights are expected to be excluded from the broad stay.

Finally, I note that the Treasury has commentated that the proposed reduction of the default period of bankruptcy from 3 years to 1 year, which was originally announced by the Government together with the safe harbour and ipso facto reforms, will be separately legislated for.

The draft legislation can be viewed on the Treasury website at www.treasury.gov.au.

The closing date for submissions on the draft legislation is 24 April 2017.

The legislation appears scheduled to commence in January 2018.

April 2017