As part of the National Innovation and Science Agenda, Treasury has released an Exposure Draft Treasury Laws Amendment (2017 Enterprise Incentives No.2) Bill 2017 which seeks to amend the Corporations Act 2001 (Corporations Act) to implement 2 key changes which are designed to promote a culture of entrepreneurship and innovation and help reduce the stigma associated with business failure.

Creation of a “safe harbour” form personal liability for company directors

  • Section 588G of the Corporations Act currently imposes personal liability on a director of a company for debts incurred by the company if at the time the debt is incurred there are reasonable grounds to suspect that the company is insolvent.  A breach of the insolvent trading provisions may also result in criminal penalties being imposed on a director.
  • The Exposure Draft Bill creates a ‘safe harbour’ for directors undertaking a restructure and protects them from personal liability – but only in certain circumstances.
  • Broadly speaking, in order to qualify for ‘safe harbour’ protection, directors must show that they have taken a course of action which, when objectively judged, is reasonably likely to lead to a better outcome for the company and its creditors (as compared to an administration, winding up, a scheme, deed of company arrangement or receivership).  The Exposure Draft Bill includes a non-exhaustive list of factors which may qualify as appropriate steps, including obtaining expert advice and preparing a restructuring plan. 
  • According to Treasury, this change will drive cultural change amongst company directors by encouraging them to engage early with financial hardship, keep control of their company and take reasonable risks to facilitate the company’s recovery instead of placing the company prematurely into voluntary administration or liquidation. 

Stay on ipso facto clauses during a formal restructure  

  • The Exposure Draft Bill also proposes to make certain ipso facto clauses unenforceable if a company has entered into a formal insolvency process.
  • An ipso facto clause is a clause which gives a party to a contract the right to terminate, suspend or amend a contract on the basis of event triggers, such as the company entering into an external administration, and the ipso facto clauses targeted by the Exposure Draft Bill are those which apply, regardless of continued payment or performance of the contract.
  • Importantly, the stay will not apply to certain financial products as set out in the Exposure Draft Bill and certain types of contracts and rights set out in Treasury’s explanatory document.  
  • According to Treasury, the aim of this reform is to prevent ipso facto clauses from reducing the scope for a successful restructure or preventing the sale of the business as a going concern.

Comments on the Exposure Draft Bill are due by 24 April 2017. 

See also Treasury’s media release dated 28 March 2017.