• Australian Insolvency Law Reform Process Continues
  • August 17, 2016
  • Law Firm: Jones Day - Cleveland Office
  • On December 7, 2015, the Australian government released its “National Innovation and Science Agenda” (the “Agenda”). In the Agenda, the government outlined its intention to make three significant reforms to Australia’s insolvency laws, adopting the recommendations of the Productivity Commission in its report, “Business Set-up, Transfer and Closure,” which was released on the same day as the Agenda. The proposed reforms include the following:
    • Reducing the default bankruptcy period (the customary length of time before the debtor receives a discharge) for individuals from three years to one year.
    • Introducing a “safe harbour” providing corporate directors with immunity from personal liability for insolvent trading under section 588G of the Corporations Act 2001 (the “Act”) during the implementation of a restructuring plan; and
    • Preventing the enforcement of “ipso facto” contractual clauses during a restructuring attempt.
    Insolvency reforms of the kind proposed in the Agenda have long been welcomed in the industry. Indeed, there has been a widespread perception that directors have increasingly appointed voluntary administrators for companies at the first sign of financial trouble to take advantage of the defense to insolvent trading in sections 588H(5) and 588H(6) of the Act. Voluntary administration has in turn triggered the destruction of companies’ enterprise value, as core creditors and suppliers have terminated their contracts in reliance on ipso facto clauses that apply when companies experience an “insolvency event.” All too often, those companies have ultimately been liquidated to the detriment of employees and other unsecured creditors.

    In advancing the reforms, the Australian government released a proposals paper entitled “Improving Bankruptcy and Insolvency Laws” (the “Proposals Paper”) on April 29, 2016, for public consultation. Public submissions on the Proposals Paper closed on May 27. The new government is expected to advance the insolvency reforms by preparing draft legislation and actively engaging with stakeholders in what would appear to be the most significant adjustment to Australia’s insolvency landscape in the last decade.