Corporate insolvency law reform draft bill released

Treasury has released draft Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 which will amend the Corporations Act 2001 corporate insolvency laws for public consultation.

The Explanatory Memorandum states: “Our current insolvent trading laws put too much focus on stigmatising and penalising failure. As part of the National Innovation and Science Agenda (NISA)  these reforms aim to promote a culture of entrepreneurship and innovation which will help drive business growth, local jobs and global success.”

The amendments will create a ‘safe harbour’ for company directors from personal liability for insolvent trading if the company is undertaking a restructure in certain circumstances. The proposal is intended to drive cultural change amongst company directors by encouraging them to engage early with financial hardship, keep control of their company and take reasonable risks to facilitate the company’s recovery instead of placing the company prematurely into voluntary administration or liquidation.

The amendments will also make clauses in a contract which allow the contract to be terminated solely due to an insolvency event (ipso facto clauses) unenforceable. The aim of this reform is to prevent these types of clauses from reducing the scope for a successful restructure or preventing the sale of the business as a going concern.

The Government has released an explanatory document setting out the types of contracts and contractual rights which are expected to be excluded from the broad operation of ipso facto clauses. These excluded contract types and rights will be formalised through forthcoming regulations, with the stay on ipso facto clauses becoming effective on 1 January 2018.

The change will not affect contracts where the ipso facto clause is inherent to the type of contract and removing the ipso facto clause would render the contract unworkable or a nonsense.
Clauses which will not be unenforceable include:

• Agreements under the Payment Systems and Netting Act 1998 (PSNA) – this includes some contracts dealt with under the Banking Act 1959 (Cth), the Insurance Act 1973 (Cth) Life
Insurance Act 1955 (Cth).
• Rights of set off
• Flexible priority arrangements
• Flawed asset arrangements
• Replacement of trustees
• Securities underwriting agreements
• Arrangements entered into under an ISDA Master Agreement
• Repurchase agreements, forward contracts, commodity contracts, swaps, rated securitisations and structured financings that include ‘flip clauses’
• Master netting agreements
• Lease contracts in respect of aircraft objects in aviation transactions (Mobile Equipment (Cape Town Convention) Act 2013 (Cth) and Protocol on Matters Specific to Aircraft Equipment)
• Securitisation arrangements involving special purpose vehicles
• Securities settlement facilities
• Covered bond transactions
• Debt factoring agreements
• Real Time Gross Settlement arrangements

The proposed reduction of the default period of bankruptcy from 3 years to 1 year will be legislated separately.


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