Be heard: submissions on insolvency law reforms close this week

Articles, Restructuring + Insolvency

On 27 May 2016, the window for submissions into the proposals set out in the Federal Government’s proposal paper “Improving Bankruptcy and Insolvency Laws”, released on 29 April 2016, will close.

The Proposals Paper invites public comment on the following changes:

Reduction in default bankruptcy period

A reduction in the default bankruptcy period has been proposed, from 3 years to 1 year. This will align Australia with the UK approach and is hoped to speed up the re-entry into the financial system for those who have fallen on hard times.

However, it is worth noting that despite the reduced period of bankruptcy, the government proposes that income contributions will continue to be paid by a bankrupt for three years after the date the bankruptcy commenced, or a longer period if the period of bankruptcy is extended.

Safe harbour models

Two different safe harbour models have been proposed to give directors protection against claims of insolvent trading under s588G of the Corporations Act as follows:

Model A

  1. If, when a debt was incurred, a reasonable director would have an expectation that the company could be returned to solvency in a reasonable period of time, then a director would not be held personally liable for the debt.
  2. The expectation must however be based on advice from a restructuring adviser who has been provided with up-to-date books and records of the company.
  3. Under this Model, the director can raise the above as a defence to an insolvent trading claim brought against them.

Model B

  1. If the debt is incurred as part of reasonable steps to maintain or return the company to solvency; and the director held an honest and reasonable belief that incurring the debt was in the best interests of the company and incurring the debt does not materially increase the risk of serious loss to creditors, then the director is not subject to a claim under s588G at all and would not be held personally liable for the debt.
  2. This Model operates as a complete carve-out for insolvent trading claims against directors if they meet the above requirements.

Ipso facto clauses

An “ipso facto” clause is a clause permitting a party to terminate an agreement based on the insolvency of the counterparty.  A prohibition on the enforcement of these clauses is said to give a company in voluntary administration a greater chance of returning to solvency.

The Proposals Paper suggests ipso facto clauses should be rendered unenforceable while a receiver is appointed or while a deed of company arrangement is in place in addition to the period that a company is in voluntary administration.

However, it is proposed some contracts will be “prescribed financial contracts” which will still remain subject to ipso facto provisions.

The Proposals Paper notes that an ipso facto clause ban would not impact indirect enforcement options of a counterparty to a contract.  Most sensibly drafted ipso facto clauses apply where a party makes a proposal to its creditors for the compromise of debts, or clauses containing consequences for non-payment by a party.

It is likely that a company facing a solvency crisis may consider an informal workout or restructuring and it would seem odd for a company to be denied the opportunity to make a proposal to creditors for fear that an ipso facto clause would be triggered.

The Proposals Paper invites comment on whether more indirect “ipso facto” style clauses should be allowed, such as triggers for accelerated repayments, and whether any ipso facto clause legislation should be retrospective.

Where can I make a submission?

Submissions can be made here, and as noted close on 27 May 2016. There is little time remaining if you wish to have your opinion heard on these important insolvency law reform matters.

For more information concerning this please contact us.

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