As part of the National Innovation and Science Agenda, the Government is proposing to reform existing insolvency laws. The Government’s aim is to encourage entrepreneurship and innovation by:

• reducing the current default bankruptcy period from three years to one year, and

• introducing a ‘safe harbour’ for company directors from personal liability where a turnaround plan is developed by a restructuring adviser, and

• making ‘ipso facto’ clauses, which allow contracts to be terminated because of insolvency, unenforceable if a company is restructuring.

Background

In November 2014, the then Treasurer, the Hon Joe Hockey MP, requested that the Productivity Commission inquired into barriers to business entries and exits and identify options for reducing these barriers where appropriate.

On 30 September 2015, the Productivity Commission presented its findings to the Treasurer, the Hon Scott Morrison MP. The insolvency law reforms are part of the National Innovation and Science Agenda which was released by the Government on 7 December 2015.

The Reforms

It’s not unusual for entrepreneurs to sometimes fail several times before they succeed. The Government believes that the current insolvency laws place too much focus on the penalties and stigma associated with business failure and are looking at measures which will encourage entrepreneurs to continue to develop start-up ventures.

Consequently the Government intends to reduce the default bankruptcy period from three years to one year. It is hoped that this will allow a bankrupt person achieve financial rehabilitation more quickly and encourage entrepreneurs to attempt new business ventures.

A ‘safe harbour’ defence will be introduced to protect company directors from personal liability for insolvent trading where a professional restructuring adviser has been appointed to develop a plan to turnaround a company in financial difficulty. This will encourage businesses to take measured risks but with the advice of an experienced mentor.

‘Ipso facto’ clauses in a contract will be unenforceable if a company is restructuring. ‘Ipso facto’ clauses allow a contract to be terminated when a business experiences an ‘insolvency event’. The appointment of an administrator is an example of an insolvency event that could trigger an ‘ipso facto’ clause in a contract. A business under administration that is unable to source goods and services due to contracts being terminated may be forced into liquidation.

The Government expects to release a proposal paper in the first half of 2016 and to have legislation passed in 2017.

The report of the Productivity Commission can be found at: http://www.pc.gov.au/inquiries/completed/business/report/business.pdf

A factsheet from the National Innovation & Science Agenda can be found at: http://www.innovation.gov.au/system/files/case-study/Factsheet%208%20-%20Insolvency%20reform.pdf