National Innovation and Science Agenda – Improving corporate insolvency law

The Proposed Reforms include a safe harbour for insolvent trading (ED Safe Harbour) and a stay on ipso facto clauses triggered by a formal insolvency process (ED Stay).

The  AICD  is  strongly  supportive  of  reform  to  Australia’s  insolvency  laws,  particularly  the insolvent trading prohibitions in s 588G of the Corporations Act 2001 (Cth) (Corporations Act), which are considered to be among the ‘strictest’ in the world.1   These laws can lead to a premature invocation of insolvency, resulting in job losses, contract terminations, destruction of goodwill and overall value diminution.   

The  Proposed  Reforms,  if  designed  effectively,  should  facilitate  innovation  and entrepreneurship  by  encouraging  responsible  risk-taking  by  companies  and  directors.  The potential of these changes – subject to getting the legislation right – cannot be underestimated. They will save rather than destroy billions in wealth and tens of thousands of jobs. Directors of an ailing company should be given a fair opportunity to take reasonable steps to turn around viable businesses for the benefit of all. 

The  AICD  supports  an  insolvent  trading  safe  harbour  that  facilitates  reasonable  efforts  to rehabilitate distressed businesses, while appropriately protecting corporate stakeholders such as  employees,  suppliers,  customers,  creditors  and  shareholders  from  reckless  and unscrupulous actions. However, after significant consultation with members and stakeholders, we are concerned that the ED Safe Harbour may not provide directors with sufficient certainty to encourage good faith restructuring. Accordingly, in Section 2 of this submission we make recommendations to enhance the effectiveness and operation of the ED Safe Harbour.

In addition, the AICD supports the government’s initiative to introduce a stay on certain ipso facto clauses. While we broadly endorse the approach taken in the ED Stay, we have again made some suggestions to improve the draft legislation.

1The Hon. Wayne Martin, ‘Official Opening Address’, Insolvency Practitioners’ Association of Australia 16 th  National Conference, Perth, 28 May 2009.