Changes to insolvency laws in Australia

By Andrew Lacey and Danyal Ibrahim, McCabes

The Australian Government recently introduced the Insolvency Law Reform Bill 2015 into Parliament. The reforms are part of a wider government initiative, labelled the ‘National Innovation and Science Agenda’, which are designed to boost innovation and entrepreneurship amongst Australians.

While the initiative is still in its embryonic stage, it will undoubtedly result in some deregulation in order to tear down some barriers to entry in the market. By way of example, the Australian Government has already announced new tax incentives for small businesses seeking to “innovate”, while also announcing new funding and promising to make it easier for small businesses to win government contracts.

Amongst the more critical of the proposed reforms are specific protections to individuals aimed at encouraging entrepreneurs and businesses to take greater risks, for instance:

1. Reducing the standard bankruptcy period for individuals from 3 years down to 1 year; and

2. Shielding directors from personal liability for insolvent trading if they appoint a professional restructuring adviser to develop a plan to turnaround a company in financial difficulty.

A further important change is the prohibition on certain types of ‘ipso facto’ clauses, an expression used for terms in a contract which permit one party to terminate the contract upon an insolvency event relating to the other. Such terms are common place in commercial contracts in Australia and the proposed reform would prohibit the inclusion of an agreement to be terminated solely due to an insolvency event but only if a company is going through a restructure.

It is intended that such a reform would assist companies in working through financial problems by giving administrators, by way of example, a greater opportunity to keep a company trading while the future of a company is being assessed and determined by creditors.

The bill will reduce the costs associated with administering companies in distress and gives greater investigative powers to the two corporate and insolvency regulators in Australia – the Australian Securities and Investments Commission (‘ASIC’) and the Australian Financial Security Authority (‘AFSA’). There are also calls to align the procedural rules for governing personal (bankruptcy) and corporate (liquidation) insolvency, including the handling of funds, record keeping and audit requirements.

While the Government initiative will not take effect until at least early 2017, it is clear that the Australian Government is less concerned with protecting creditors and more concerned about wider policy objectives such as stimulating economic growth. For lawyers, accountants and business advisors, the challenge will be to ensure that their clients remain protected when engaging in business going forward, including protection against the risk that the other party to a transaction will become insolvent. Reducing the consequences of insolvency, which is essentially what the reforms seek to achieve, is likely to be met with caution by investors.

This move is, however, consistent with other recent attempts to make Australia more competitive on an international scale, such as the free trade agreements now in place with China, Japan and South Korea.

While it is too early to predict the precise form that the legislation will take, the Government’s commitment to spend $1.1 billion on the project will almost certainly provide a much needed boost in innovation and economic growth for Australia in the coming years.

Andrew Lacey

Andrew Lacey

McCabes, Sydney, Australia
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Danyan Ibrahim

Danyan Ibrahim

McCabes, Sydney, Australia
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Published: May 2016; Photo:

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