Proposed insolvency reforms released for consultation

Posted by on 12/04/2017

Governance Institute has welcomed proposed reforms to Australia’s insolvency laws.  The draft legislation was released at the end of March by the Minister for Revenue and Financial Services, Kelly O’Dwyer.

The reforms aim to create a ‘safe harbour’ from personal liability for company directors and to institute a stay on ‘ipso facto’ clauses during a formal insolvency process.

O’Dwyer says the proposed safe harbour will help protect company directors involved in a restructure from personal liability for insolvent trading in certain circumstances.

‘[They provide] necessary breathing room for directors to turn a company around rather than allowing it to fail for fear of personal liability,’ she says.

‘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.’

The amendments will also make ipso facto clauses, which terminate or amend a contract merely because a company has entered into a formal insolvency process, unenforceable. This will give companies a greater chance to successfully restructure and may boost the likelihood of being able to sell the business as a going concern.

The 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. It says these will be formalised through regulations, with the prohibition on the operation of ipso facto clauses becoming effective on 1 January 2018.

Submissions on the reforms are due by 24 April 2017.

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