As part of the National Innovation and Science Agenda (NISA), the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer, has released draft legislation which reforms Australia’s insolvency laws and an accompanying draft explanatory statement for public consultation. The draft legislation will amend the Corporations Act 2001 to promote a culture of entrepreneurship and innovation and help reduce the stigma associated with business failure. This will help drive business growth, local jobs and global success.
The amendments will create a ‘safe harbour’ for company directors from personal liability for insolvent trading if the company is undertaking a restructure in certain circumstances. This will drive cultural change amongst company directors by encouraging them to engage early with financial hardship, keep control of their company and take reasonable risks to facilitate the company’s recovery instead of placing the company prematurely into voluntary administration or liquidation.
The amendments will also make ‘ipso facto’ clauses unenforceable if a company has entered into a formal insolvency process. Currently, ‘ipso facto’ clauses allow contracts to be terminated solely due to an insolvency event. The aim of this reform is to prevent these types of clauses from reducing the scope for a successful restructure or preventing the sale of 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 broad stay on the operation of ipso facto clauses. These excluded contract types and rights will be formalised through forthcoming regulations, with the stay on ipso facto clauses becoming effective on 1 January 2018. The Minister welcomes feedback on the appropriateness of the proposed exclusions and whether further exclusions may be warranted.
The Attorney-General is the responsible Minister for the proposed reduction of the default period of bankruptcy from 3 years to 1 year, which was announced along with these reforms, and will be legislated separately.