Following consultation on exposure draft legislation between 28 March 2017 and 24 April 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Bill 2017 (Cth) (Bill) was introduced into the House of Representatives and received its second reading speech on 1 June 2017.

The Bill proposes to:

  • create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency provided that they can show that, after suspecting that a company is, or may become, insolvent, 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. According to the Explanatory Memorandum, this will drive cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of simply placing the company prematurely into voluntary administration or liquidation; and
  • make certain types of ‘ipso facto’ clauses (that allow one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty ) unenforceable while a company is restructuring under administration, a compromise or arrangement aimed at avoiding being wound up in insolvency or when a managing controller has been appointed over all or substantially all of the property of the company. According to the Explanatory Memorandum, this reform is aimed at enabling businesses to continue to trade in order to recover from an insolvency event instead of these clauses preventing their successful rehabilitation.

According to the Explanatory Memorandum, the proposed amendments will reduce instances of a company proceeding to a formal insolvency process prematurely and where companies do enter into particular formal insolvency procedures, they will have a better chance of being turned around or of preserving value for creditors and shareholders. In turn, this will promote the preservation of enterprise value for companies, their employees and creditors, reduce the stigma of failure associated with insolvency and encourage a culture of entrepreneurship and innovation.

The director safe harbour reforms are to take effect from the day after Royal Asset and the stay on ipso facto clauses will take effect from the later of 1 July 2018 or the day six months after Royal Assent (unless an earlier date is proclaimed by the Governor-General).