The Insolvency Law Reform Act 2016 (Cth) (the Act) will come into effect in March 2017 after the Senate passed the Insolvency Law Reform Bill in Febaury, 2016. The Act significantly reshapes the banktuptcy and insolvency laws in Australia and intends to create more favourable economic regulations for small businesses, entrepreneurs and startups. The Act also amends provisions of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth).
Key reforms include:
- New rules and regulations for creditors and liquidators, including different licence and registration requirements, remuneration limits and disciplinary procedures;
- New provisions to improve the relationship and interactions between creditors and insolvency practitioners including a process for removing an insolvency practitioner and appointing a replacement through an ordinary resolution, abolishing mandatory meetings and reporting obligations, and the right of creditors to make “reasonable” requests for information and records in connection with the external administration;
- ASIC will be given more power to monitor and audit the conduct of insolvency practitioners, including:
- Having the power to enforce the Corporations Act’s requirements by issuing written directions to liquidators to comply; and
- Powers to suspend or cancel a person’s registration as a liquidator.
What are the Insolvency Law Reform Proposals?
The Government also proposed further reforms to existing corporate insolvency laws to assist up and coming businesses that may encounter financial trouble during their early stages. The reform proposals intend to encourage new businesses, innovation and entrepreneurship while also protecting creditors by:
- Bringing down the default personal bankruptcy period from three years to one year;
- Implementing a ‘safe harbour’ for company directors; and
- Banning ‘ipso facto’ clauses in respect of corporate insolvency events.
Default Bankruptcy Period
The current default bankruptcy period for individuals is set at three years – a harsh penalty for a fledging business operating as a sole trader or a director of a company (a bankrupt cannot be a company director).
The proposed changes would amend provisions of the Bankruptcy Act 1966 (Cth) and is intended to encourage entrepreneurial risk and reduce stigma relating to bankruptcy.
The reduction of the bankruptcy period would also lessen restrictions that are currently imposed on bankrupt individuals, such as the prohibition on being able to be a company director, travelling overseas or incurring further debts. This is proposed so as to facilitate the re-entry of skilled entrepreneurs back into business who would otherwise be barred from doing so.
However, the proposals intend to maintain the power of a trustee to extend a bankruptcy period to up to eight years. It also does not affect the burden of the bankrupt to continue to pay income contributions for the full three years (or longer) where their after-tax income exceeds the prescribed maximum amount.
Creating a “Safe Harbour”
The proposals paper included aims to implement a ‘safe harbour’ defence to protect directors from personal liability for trading while insolvent and will amend sections of the Corporations Act 2001 (Cth). Where solvent but struggling companies have engaged a professional restructuring advisor to oversee its return to financial stability, the proposals will allow them to continue trading without risk of liability for insolvent trading.
Ipso Facto Clauses
Commercial contracts usually contain an ipso facto clause that allows one party to terminate or modify the agreement if an insolvency event occurs. The proposals paper states that an ‘insolvency event’ can include:
- Appointing a voluntary administrator to the company;
- The company undertakes a scheme of arrangement to avoid administration or insolvent liquidation;
- A receiver or controller has been appointed; and
- The company enters into a deed of company arrangement.
The proposals paper recommends amending the Corporations Act 2001 (Cth) to make the use of ipso facto clauses void and unenforceable. The reason being is that the power of parties to terminate a contract in circumstances relating to insolvency can be extremely damaging to businesses that may rely on such contracts to operate. The proposed changes would make ipso facto clauses unenforceable if the insolvent company is currently in voluntary administration or is taking steps to form a scheme of arrangement.
Proposed changes to insolvency laws are likely to have a positive effect on startups and small companies, and promote entrepreneurship and innovation. In their report, the government proposed to reduce the bankruptcy period from three years to one, implement a “safe harbour” defence for company directors exposed to insolvent trading as well as prohibit ipso facto clauses in relation to insolvency events.
If you have any questions about how the proposed reforms might affect you or your business, get in touch with our insolvency and bankruptcy lawyers on 1300 544 755.