From 1 July 2018, a number of wide-ranging reforms to Australia’s corporate insolvency regime will commence. The Treasury Laws Amendment (2017) Enterprise Incentives No.2) Bill 2017 and the Bankruptcy Amendment (Enterprise Incentives) Bills 2017 aims to strike a better balance between encouraging entrepreneurship and protecting creditors. The most significant changes are:
- Reducing the current default bankruptcy period from three years to one year.
- Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if the company is undertaking a restructure.
- Making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.
Default Bankruptcy Period
The bankruptcy period refers to the period of time in which you are considered bankrupt. This affects your ability to travel overseas, start a business, be monitored by creditors, and have your assets and finances controlled. The default period is currently 3 years, which may be extended for a criminal matter or for special circumstances.
The new amendments attempt to alleviate stigma surrounding bankruptcy and encourage innovation, acknowledging that bankruptcy can sometimes occur as a result of misfortune while running a business or necessary risk taking, rather than intentional wrongdoing.
Director’s Safe Harbour
Under the current liability regime, a company director risks liability under s588G(2) of the Corporations Act 2001 (Cth) if they:
- are a director at the time the company incurs a debt; and
- the company is insolvent or is likely to become insolvent.
After criticisms that the regime was too harsh, the government introduced new provisions to give directors safe harbour protections if they start developing one or more courses of action that are ‘reasonably likely’ to lead to a ‘better outcome for the company than the immediate appointment of an administrator or liquidator’.
Ipso facto clauses
An ipso facto clause is a contractual provision that allows one party to terminate the contract upon the occurrence of an insolvency event. These amendments prevent the enforcement of ipso facto clauses during:
- the appointment of a voluntary administrator,
- the appointment of a managing controller, or
- where the company is undertaking a scheme of arrangement for the purpose of avoiding insolvency.
As a result, when terminating a contract, the terminating party can only terminate for reasons other than reasons relating to insolvency or restructuring.
The amendments aim to encourage companies to take proactive steps to restructure the company and prevent insolvency without fear or early termination of their contractual arrangements.
Therefore, it is recommended that contracts entered into from 1 July 2018 should not contain an ipso facto clause as this will be considered unenforceable.
Future contracts will need to be carefully reviewed to account for these legislative changes.
Please contact us and we will help you protect your interests without falling foul of these amendments to the Corporations Act 2011.