The government's proposed changes to Australia's insolvency laws as part of the NISA are:  

  • to reduce the period of bankruptcy from three years to one year;
  • to introduce a safe harbour to protect directors from personal liability for insolvent trading if they appoint a restructuring advisor to develop a turn-around plan; and
  • to restrict the enforceability of "ipso facto" clauses, that would otherwise allow one party to terminate a contract upon the occurrence of an insolvency event to the counter-party, in circumstances where that counter-party is undertaking a restructure.

Each of these initiatives are outlined below.

Bankruptcy

A reduction in the period of bankruptcy has the clear objective of encouraging entrepreneurship by softening the consequences of business failure for sole traders and partners and reducing the stigma associated with that failure. A recent report by the Productivity Commission asserts that business-related bankruptcy makes up approximately 20% of all bankruptcies in Australia.   

Safe harbour

The introduction of a safe harbour for directors, and the precise mechanics of its operation, is likely to be the most contentious of the proposed changes.  The safe harbour recommendation is targeted at the perceived problem that director personal liability for insolvent trading encourages directors to appoint a voluntary administrator when a company is in financial difficulty, rather than to take sensible risks while continuing to trade the company out of financial difficulty. Recent submissions to Australia's Productivity Commission did not all agree that this problem existed in practice.

The proposed procedure will be entirely new legal territory. Despite what appears to be widespread support to provide some protection for directors from insolvent trading liability in appropriate circumstances, the proposals to date differ as to how this should be achieved.  Accordingly, it is likely that the legislative amendments will be substantial and relatively slow in their development.

It is not apparent whether or not the safe harbour mechanism is proposed to be available to protect directors from other sources of personal liability that may eventuate in an insolvency scenario - for example, the Commissioner of Taxation's "Director Penalty Notice" regime, the suite of general directors' duties and (in the case of listed companies) the continuous disclosure regime in theCorporations Act 2001 - or only in respect of insolvent trading.  Obviously, a more limited safe harbour that does not deal comprehensively with the various sources of potential liability will reduce the efficacy of the safe harbour mechanism.

"Ipso facto" termination clauses

While restrictions on enforcement of "ipso facto" clauses in Australian corporate insolvencies will be a completely new feature on the landscape, there is extensive experience in the United States (amongst other jurisdictions) of similar restrictions, and an equivalent restriction on termination rights already exists in Australia's personal insolvency laws.

The proposed reform leaves open the question of whether or not, if ipso facto clauses are rendered unenforceable, counterparties could build in contractual protections to permit the renegotiation of key terms on insolvency (e.g. by swapping from existing supply terms to cash on delivery, or cash on account). This aspect of the recommendation will require careful consideration prior to any implementation in law.

A proposal paper covering these initiatives is expected in 2016, with a view to legislation passing in mid 2017.