New laws encourage business turnaround and protect Directors

The Federal Government has proposed numerous changes to Australia’s insolvency laws. Some of these came into effect on 1 March 2017, and the rest will come into effect on 1 September 2017.

The two changes that could benefit Directors the most are:

  • introducing Safe Harbour for Directors of companies facing insolvency
  • restricting the enforcement of ‘Ipso Facto’ clauses.

Safe Harbour to protect Directors from insolvent trading claims

Directors who keep operating a company that’s in financial difficulty currently risk the claim of insolvent trading. As the penalties and consequences of insolvent trading can be severe (e.g. civil penalties, compensation proceedings, and criminal charges), that risk is enough to stop Directors from trading a viable business that’s merely experiencing short-term cash flow issues.

But that may soon change.

One of the government’s proposals is to let Directors claim a ‘safe harbour’ defence to an insolvent trading claim if they appoint a registered restructuring advisor to develop a turnaround plan for the company. The role of the advisor, who must be independent, will be to create a plan to restructure the business so it can keep operating as a viable business.

This ‘safe harbour’ defence means Directors will be able to get help from an advisor to restructure the business without the risk of an insolvent trading claim being made against them.

Putting restrictions on Ipso Facto clauses

Ipso Facto clauses allow one party to terminate a contract against another party the moment there’s an insolvency event (generally the appointment of an external administrator). Exercising these clauses can often result in the company’s business going into liquidation.

Under the government’s new laws, Ipso Facto clauses will be unenforceable if:

  • a voluntary administrator has been appointed
  • the company is in the process of forming a Scheme of Arrangement.

This will allow a company to restructure its business without having to worry about contracts (such as those with suppliers) being terminated just because an administrator has been appointed.

Directors now have a defence against insolvent trading

It seems the government is doing its best to remove the stigma of risk-taking and insolvency in Australian business. And that’s a good thing, because it will give Directors a chance to save their viable businesses through restructuring, without having to worry about insolvent trading claims or contracts being terminated whenever an administrator is appointed.

Of course, we still need to ensure creditors are adequately protected. But striking the right balance between protecting creditors and saving Australian businesses through restructuring will not only help creditors and Directors, but also Australia’s overall economy.