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Insolvency reforms could help avoid business closures

Insolvency Law News | February 2016

The Insolvency Law Reform Bill 2015 [“Bill”] was introduced into Parliament by the Federal Government on 3 December 2015. The changes to insolvency laws in Australia which are proposed by the Bill suggest taking a less punitive approach to insolvency and providing greater incentives for companies facing financial stress to restructure themselves.

These proposed changes may assist more businesses to avoid closure and the subsequent losses to stakeholders which inevitably occur.

Some of the proposed changes include:

  • Developing ‘safe harbour’ provisions for directors from personal liability for insolvent trading if they have appointed a restructuring adviser to develop a turnaround plan for the company. The idea behind this is to assist company directors with more time to receive guidance in the restructuring of their business and to ensure the best outcome for employees, creditors and (mostly) stakeholders;
  • Prohibiting parties from terminating contracts with trading partners solely on the basis that they have become insolvent, or are undergoing a restructure; and
  • Reducing the bankruptcy period from 3 years to only 1 year.

These proposed changes are of particular relevance given the current slowing economic climate and the promotion of innovation. Australian laws have often been referred to as creating a “nanny state” by overseas observers and have been criticised for stifling innovation and enterprise and the Federal Government's proposed changes to insolvency law appear to be a step in the right direction for entrepreneurs and innovative new markets. These changes may assist in the prevention of widespread business failure but this
could occur at the expense of encouraging unscrupulous directors, business operator
and "entrepreneurs", who see the changes as a means of exploiting the safe harbours
provided by the proposed changes to the law.

Forum Law’s solicitors have advised and assisted liquidators, administrators and receivers as well as creditors and debtors for over 20 years. If you have any questions or concerns about legal matters regarding personal or company insolvency give us a call for an obligation-free chat for up to 30 minutes on the phone or make a time to visit us in Leichhardt on +61 2 9560 3388.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.