Major insolvency reforms – what does this mean for your clients?

The Federal Government will introduce significant reforms to Australia’s corporate and personal insolvency laws this year following the commencement of the Insolvency Law Reform Act 2016 (Cth). The changes are an integral component of the Federal Government’s agenda for improving economic incentives for innovation and entrepreneurialism. 

The reforms

The first set of changes are due to take place from 1 March 2017, with the second set to follow on 1 September 2017.

The reforms result in major amendments to the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) which aim to:

  • reduce costs associated with insolvency administrations
  • promote competition between insolvency practitioners
  • encourage directors to act in the best interests of the company
  • enhance communication between practitioners, creditors and stakeholders, and
  • increase the power of creditors in controlling the insolvency administration process.

The reforms will have important consequences for practitioners who are accredited members of organisations such as the Law Institute of Victoria (LIV), CPA Australia (CPA), Chartered Accountants Australia and New Zealand (CA), and Australian Restructuring Insolvency & Turnaround Association (ARITA).

Some of the key changes are:

  • new registration and disciplinary requirements for insolvency practitioners
  • increased ASIC powers to regulate corporate insolvency and audit the conduct of insolvency practitioners
  • new procedural rules for insolvency practitioners in corporate and personal insolvency
  • increased power of creditors over insolvency practitioners when conducting voluntary administrations
  • reduction of the bankruptcy period from three years to one year
  • introduction of a ‘safe harbour defence’ to protect directors from personal liability for insolvent trading if they have appointed a qualified restructuring advisor to assist in reviving the business, and
  • making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.

Role of the restructuring advisor

As the reforms are likely to raise the standard of director’s duties and creditor protection, it will become vital for businesses to appoint a restructuring advisor at the right time to develop a turnaround plan. With the right restructuring advice, businesses are more likely to make informed decisions and reduce the impacts of insolvency, potentially resulting in better outcomes for creditors.

Other anticipated outcomes

Other anticipated outcomes associated with these reforms include:

  • more conservative lending criteria from banks
  • promotion of entrepreneurship and innovation
  • reduction in insolvent trading claims, and
  • increased authority and control for creditors.

How can we help?

If you would like to know more about the insolvency reforms or if any of your clients require assistance, please contact Partners Legal.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.