Safe Harbour and Ipso Facto clauses: What proposed insolvency law changes will mean for directors

The Federal Government recently proposed numerous changes to Australia’s insolvency laws, which are expected to be introduced in 2017. The changes being proposed include:

  • introducing Safe Harbour for Directors of companies facing insolvency
  • restricting when Ipso Facto clauses can be enforced.

So how will these proposed changes affect company directors? Let’s look at each one a bit more closely.

Safe Harbour

As the law currently stands, if a director continues to operate their company while it’s experiencing financial pressure, they risk the claim of trading while insolvent. Naturally, this can deter directors from trading, even though it may be a viable business that’s merely experiencing a short-term cash flow shortage.

But if the proposed changes come into effect, the director will be able to claim a ‘safe harbour’ defence if they appoint a registered restructuring advisor to develop a turnaround plan for the company. The advisor must be independent, and their role will be to formulate a plan for restructuring the business so it can continue operating as a viable business.

Introducing this safe harbour defence will mean directors can get help from an advisor to restructure the business without the risk of an insolvent trading claim being made against them.

Restrictions on Ipso Facto clauses

Ipso Facto clauses allow one party to immediately terminate a contract against another if there’s an insolvency event (generally the appointment of an external administrator). Exercising Ipso Facto clauses can often result in the cessation of a company’s business and subsequent liquidation.

If the proposed changes come into effect, Ipso Facto clauses will be unenforceable if either:

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

This will allow a company to be restructured without the threat of contracts (e.g. those with suppliers) being terminated because an external administrator has been appointed.

The effects of these proposed changes?

Putting these proposals into effect will certainly help company directors. They’ll be able to restructure their business without the risk of an insolvent trading claim or major contracts being terminated when an administrator is appointed.

This means their companies will have a much better chance of surviving in the long run.

If you’d like to know more about these proposed changes, or any of the other changes being proposed for Australia’s insolvency laws, don’t hesitate to get in touch with us.