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Proposed insolvency law reforms may fix Australia’s ‘broken’ system

THE creation of a ‘safe harbour’ from personal liability for company directors potentially facing claims during a formal insolvency process are one step in a reform process for Australia’s troubled business administration regime.

Business leaders have lamented the economic and personal damage caused by a succession of companies taken ‘too early’ into administration and lost to liquidation by directors fearful of Australia’s historic legal bias against recovering ‘temporarily troubled’ companies. 

There have been wide-ranging calls, in the wake of troubled voluntary administration cases such as Cubby Station and Arrium, for Australia to instate a form of the US Chapter 11 system which allows company directors to restructure companies while they are protected from action by creditors. 

Changes to the business environment in the wake of the Global Financial Crisis (GFC) and criticism of the high-cost methods of receiver-administrators have highlighted the problems. The norm has been a wholesale loss of wealth for shareholders, creditors and employees.

Australian insolvency practices have also been highlighted as stalling the technology start-up sector.

As part of the National Innovation and Science Agenda (NISA), Minister for Revenue and Financial Services, Kelly O’Dwyer released draft legislation in early 2017 and called for consultation on reforms to Australia’s insolvency laws.

Ms O’Dwyer said the legislation created a ‘safe harbour’ from personal liability for company directors and instituted a stay on ipso facto clauses during a formal insolvency process.

Ms O’Dwyer said the proposed safe harbour would apply to directors of companies undertaking a restructure and will protect them from personal liability for insolvent trading in certain circumstances.

“This will drive cultural change amongst company directors and encourage them to engage early with a plan for business rescue, to keep control of the company while the plan is executed, and to take reasonable risks to facilitate the company’s recovery, rather than placing the company prematurely into voluntary administration or liquidation,” Ms O’Dwyer said.

“The creation of a safe harbour creates necessary breathing room for directors to turn a company around rather than allowing it to fail for fear of personal liability. This will not only promote a culture of entrepreneurship and help reduce the stigma associated with business failure, but offers businesses a better chance of restructuring outside of a formal insolvency, which often produces significantly better outcomes for the company, its employees and its creditors.”

Ms O’Dwyer said the amendments would also make ipso facto clauses, which terminate or amend a contract merely because a company has entered into a formal insolvency process, unenforceable. Making these clauses unenforceable will give companies a greater chance to successfully restructure and may increase the likelihood of being able to sell the business as a going concern.

The Federal Government has also released a further explanatory document setting out the types of contracts and contractual rights which are expected to be excluded from the prohibition on the operation of ipso facto clauses. These excluded contract types and rights will be formalised through forthcoming regulations, with the prohibition on the operation of ipso facto clauses becoming effective on January 1, 2018.

The exposure draft legislation and explanatory statements are available on the Treasury Consultation Hub.

www.treasury.gov.au

 

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