Turnbull win keeps insolvency reforms on the agenda

July, 2016

By Joanne Hardwick, Partner and Danielle Gorman, Lawyer.

We now have confirmation that the Coalition will return to power with a slim majority in the House of Representatives.  The Turnbull Government’s innovation and science programme featured throughout the election campaign but, having regard to the election result, it is unclear whether that policy, and others, truly resonated with the Australian public.

The innovation and science programme promises to deliver the greatest makeover of our insolvency laws in decades.  Safe harbour for directors, neutralising ipso facto clauses where corporate restructure is underway, and reducing the bankruptcy period from three to one year, are three key features of the programme.

However, the issue now is whether the Government has the numbers in the Senate to pass any legislation that will overhaul our insolvency laws, particularly given it will need the support of an eclectic group of crossbenchers to do so.

It is intended that the reforms will strike a better balance between encouraging entrepreneurship and protecting creditors.  The impact will be to remove the stigma associated with business failure and create a culture that encourages us to embrace risk, learn from mistakes, be ambitious and experiment to find solutions.

On 29 April 2016 the Government released its proposal paper for improving bankruptcy and insolvency laws for public consultation and called for submissions by 27 May 2016.  Once the dust settles after the election and the Government gets on with the job of governing, the spotlight will be on these reforms and draft legislation, which the Government expects to introduce by mid-2017.

So what have industry bodies said about the Government’s proposal for improving our insolvency laws?   It seems there is clear support for changing the law to protect companies from the operation of ipso facto clauses where an insolvency event has happened, which, if triggered, can have dire consequences in a case where corporate rescue is an option. In relation to safe harbour, whilst there is widespread industry support for reform there appears to be divergent views on the appropriate model this Government should pursue.

ARITA and the Australian Chamber of Commerce & Industry support Safe Harbour Model A which provides directors with a defence from insolvent trading liability if, at the time the debt was incurred, they had a reasonable expectation, based on advice from a suitably qualified and experienced restructuring adviser, that the company could be returned to solvency within a reasonable period of time, and the director takes reasonable steps to ensure it does so.

Conversely, the Australian Institute of Company Directors and the Law Council of Australia prefer Safe Harbour Model B, with modifications.  This model contemplates safe harbour as a carve out to the current insolvent trading laws, rather than a defence.  Under this model, the burden of proof would be on a liquidator to establish that a director has breached any one of the three limbs contained in the provision.  These limbs seek to provide directors who are acting in the best interests of the company and its creditors as a whole with protection from liability so that they may attempt to return the company to profitability.

Safe Harbour Model B does not necessarily require the director to appoint a restructuring adviser in order to avoid liability but this would certainly be relevant to the Court’s consideration as to whether a director took “reasonable steps to maintain or return a company to solvency within a reasonable period of time”.

Safe Harbour Model A appears to be the frontrunner at present, however, regardless of which model is ultimately pursued, the public and most certainly the Senate crossbenchers, will be keen to ensure employees and small business are protected and that there is zero tolerance for rogue directors and unregulated insolvency professionals who may seek to abuse the safe harbour protections that are considered necessary to kick start new business in Australia.

The outcome of the election has set the scene for an interesting year ahead, particularly for company directors, advisers and insolvency professionals.  When, how, and what any changes will mean for you are questions we will attempt to answer in the coming months as we watch, with great interest, how this Government will approach its innovation and science agenda and any insolvency law reform.

 

Contact Mills Oakley

 

Joanne Hardwick | Partner
T: +61 3 9605 0949
E: jhardwick@millsoakley.com.au

 

 

 

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