Insolvency reform a shift in the right direction?

Posted 7 March 2016

In a recent push for reform, those in government legal jobs are making significant changes to Australia's insolvency legislation. The reforms should bring much-needed stability to an inherently volatile environment. 

In the first of a number of planned changes, the Insolvency Law Reform Bill 2015 passed through Australian parliament in February this year. While the Bill only makes small alterations to aspects relating to stakeholder communication and registration of insolvency practitioners, it is a sign of things to come. 

One of the main aims of the new Bill and the forthcoming reforms is to move the legislative framework towards a pro-business insolvency regime - in line with Australia's innovation strategy. To accomplish this, the reforms are expected to target aspects of liability in relation to both administrators and company directors.

Under current legislation, directors can be held personally accountable for allowing wrongful trading. As such, directors are more attracted to file for insolvency and commence proceedings even though they could be in a position to attain better outcomes through an out-of-court restructuring. 

The inability to find other avenues of recovery is compounded by the risk of liability that government-appointed administrators face under the current regime. If new debts are accrued while they are overseeing restructuring, they can face penalties and even legal action. 

Due to the expense of external administration as well as the general reluctance of administrators to keep companies operating in the face of personal liability, this often leads to an unfavourable result for creditors, employees and directors.

The Bill's focus on ipso facto clauses should prevent contractual parties from terminating their contracts once insolvency procedures commence. This change could alter the relationships of power between vendors and the insolvent business. By reducing the ability of these parties to enforce their ipso facto clauses, the Bill should ensure businesses have a greater capability to return to their feet. 

While many see this is a major leap forward for the Australian commercial community, the ability of businesses and startups to bounce back from insolvency needs to be balanced with the ethics of directors. 

The reforms are somewhat based on the American regime that offers no punishment for directors who lead their companies into deepening insolvency. If a company enters this state, it can potentially take on heavier burdens of debt thus leading to worse recoveries for creditors.

With more insolvency laws on the horizon, professionals in legal jobs will need to develop legislation that balances both moral considerations with what they believe is best for Australia's economy.