28 March 2017
Media Release - #2017025, 2017

Government releases insolvency law reforms for consultation

As part of the National Innovation and Science Agenda (NISA), the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, today released draft legislation which reforms Australia’s insolvency laws and an accompanying explanatory statement for public consultation.

This legislation creates a ‘safe harbour’ from personal liability for company directors and institutes a stay on ‘ipso facto’ clauses during a formal insolvency process.

Minister O’Dwyer said the proposed safe harbour will apply to directors of companies undertaking a restructure and will protect them from personal liability for insolvent trading in certain circumstances.

“This will drive cultural change amongst company directors and encourage them to engage early with a plan for business rescue, to keep control of the company while the plan is executed, and to take reasonable risks to facilitate the company’s recovery, rather than placing the company prematurely into voluntary administration or liquidation,” Minister O’Dwyer said.

“The creation of a safe harbour creates necessary breathing room for directors to turn a company around rather than allowing it to fail for fear of personal liability. 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. Making these clauses unenforceable will give companies a greater chance to successfully restructure and may increase 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. These excluded contract types and rights will be formalised through forthcoming regulations, with the prohibition on the operation of 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 exposure draft legislation and explanatory statements are available on the Treasury Consultation Hub.

Submissions are due by 24 April 2017 and can be sent to insolvency@treasury.gov.au.