Incoming Insolvency law reforms

With new changes to Australia’s corporate insolvency laws coming into effect next month, it is important to be aware of the salient features of these changes and some of the reasons why they’re occurring.

What is actually happening?

Two sets of law reforms are beginning to take shape, the first being the Insolvency Law Reform Act 2016 commencing in March and the reforms outlined in the National Innovation and Science Agenda (NISA) “Improving bankruptcy and insolvency laws” proposals paper.

The first act contains a number of extra regulations and rules for creditors and liquidators, helping to reshape administrative procedures in the insolvency industry. Including increasing ASIC’s ability to regulate corporate insolvency and augmenting the standing of creditors when interacting with insolvency practitioners.

The second proposal was created April 2016 and gave members of the public to submit modifications to the proposal. Three major changes are outlined:

  1. Decreases the default bankruptcy period to one year from three years.
  2. Established a ‘safe harbour’ for directors from personal liability for insolvent trading is the company is restructuring.
  3. Ensuring ‘ipso facto’ clauses unenforceable if a company is undertaking a restructure.

The NISA made these proposals due to the need to “to encourage Australians to take a risk, leave behind the fear of failure and be more innovative and ambitious.” Citing the fact that, “Concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason early stage investors are reluctant to get involved in a startup. Our current insolvency laws put too much focus on penalising and stigmatising the failures, so we’re making some changes to those laws.”

Overall, it will be interesting to see how the incoming reforms are going to effect corporate restructuring and voluntary liquidation with the ultimate aim of maintaining the fine balance of entrepreneurship and accountability.