Bankruptcy and insolvency reform proposals

The Government has released a proposals paper on measures to improve Australia’s bankruptcy and insolvency laws by making changes to the default bankruptcy period, introducing a restructuring safe harbour for directors, and changing the operation of insolvency event clauses in contracts. Background.

Bankruptcy proposals
The proposals include:

  • reducing the default bankruptcy period and related restrictions to one year;
  • retaining the trustee’s ability to object to discharge and to extend the period of bankruptcy to up to eight years;
  • separating the obligation to pay income contributions from the default bankruptcy period. Instead, individuals will continue to pay income contributions for three years even with the reduction in the default bankruptcy period. When the period of bankruptcy is extended to five or eight years, income contributions will also be payable for that extended period;
  • reducing credit restrictions under the Bankruptcy Act to one year, subject to any extension for misconduct.

Restructuring safe harbour
A safe harbour will provide directors with a restructuring option that allows them to retain control of the company while receiving formal advice rather than necessarily surrendering control to an external administrator.

It would be a defence to under the Corporations Act if, at the time when the debt was incurred, a reasonable director would have an expectation, based on advice provided by an appropriately experienced, qualified and informed restructuring adviser, that the company can be returned to solvency within a reasonable period of time, and the director is taking reasonable steps to ensure it does so.

Insolvency termination clauses
The Government proposes that any term of a contract or agreement which terminates or amends any contract or agreement (or any term of any contract or agreement), by reason only that an ‘insolvency event’ has occurred would be void. Any provision in an agreement that has the effect of providing for, or permitting, anything that in substance is contrary to the above provision would be of no force or effect.

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