This month, the Commonwealth government announced significant proposed changes to Australia’s personal and corporate insolvency regimes.

These changes are intended to encourage entrepreneurship and innovation, strike a better balance between encouraging entrepreneurship and protecting creditors and reduce the stigma associated with failed ventures (1).

If enacted, these proposals will represent some of the broadest and most far-reaching changes in the best part of a decade to Australia’s personal and corporate insolvency regimes. In short, the proposed changes include:

  • Reducing the default duration of a personal bankruptcy from the current three year period to a single year;
  • Introducing new “safe harbour” provisions for directors of companies undertaking a restructure (permitting directors to avoid personal liability under the insolvent trading provisions when following the advice of an appointed restructuring advisor);
  • Nullifying ipso facto contract clauses from taking effect in restructures (essentially prohibiting clauses from being effective that permit termination based on an insolvency event) (2).

Each of these proposals would represent highly significant changes in their own right. The government intends to release a proposal paper for all three changes by mid-2016, followed by legislation implementing their enactment by mid-2017.

Whilst these proposals will undoubtedly assist new businesses seeking to restructure their affairs (where this remains a feasible prospect) and potentially limit the personal liability of directors in respect of failed or risky ventures, any shift favouring risk takers inevitably means a corresponding change in the risk profile confronting their lenders, creditors, customers and business partners alike.

Depending on which of these changes are ultimately enacted, and the final form they assume, it remains to be seen how they will interact with the risk profiles facing each of these groups, particularly should a company enjoy a potential form of quasi-immunity from the typical arrangements of voluntary administration when undertaking a proposed “restructure”.

Equally, given the exceptionally broad use of insolvency-dependent clauses throughout commercial agreements and leases in Australia, the impact of these changes at the very minimum is likely to result in significant compliance costs for any business which relies to any material extent on their effectiveness.

If you would like further information on any aspect of these changes, or advice on how they could affect your business, contact Robert Ross, director of Composite Law for advice on (08) 6162 2399.

 

(1) Australian Government, National Innovation & Science Agenda, Factsheet 8 – Insolvency Laws Reform

(2) Ibid.