Insolvency legislation reforms

Posted on Apr 10, 2017 by Dean Frith   |   Categories: Insolvency & Bankruptcy

Draft legislation has recently been released for public consultation, as a result of the recent review conducted as part of the National Innovation and Science Agenda introduced by the Federal Government.

The changes attempt to reduce the stigma associated with corporate failure in Australia, and to encourage company directors to address any financial hardship at an early time.

Providing Safe Harbour

It is proposed to amend the Corporations Act 2001 (Cth) (“the Act”) to create a ‘safe harbour’ for company directors from personal liability for insolvent trading in circumstances where the company is undertaking a restructure.

It is intended that this will allow directors to keep control of their companies and take reasonable risks to facilitate the company’s recovery, rather than panicking and prematurely placing the company into administration or liquidation.

Ipso Facto Clauses

The Act will also be amended to make ipso facto clauses unenforceable if a company is undertaking a restructure.

Ipso facto clauses are provisions present in most commercial contracts which allow one party to terminate the contract, solely due to an insolvency event on behalf of the other party. These clauses can greatly reduce the scope for a successful restructure or prevent the sale of the business as a going concern (and therefore not subject to certain tax exemptions).

There are particular circumstances in which the broad stay on ipso facto clauses, which will come into effect on 1 January 2018, will not apply.