Vol 14 (2017) - Issue 5

Article preview

Australian Insolvency Law Reforms: Innovation and Rehabilitation

Introduction
Australia's current insolvency law regime has largely remained unchanged since the 1980s. During its life it has been the subject of criticism from a broad base of stakeholders and commentators for being overly protective of creditors and, as a direct result, stifling entrepreneurialism and healthy risk taking by businesses. The combined effect of the premature appointment of external administrators and the exercise of ipso facto rights by suppliers and other creditors has been perceived to cause distressed but salvageable businesses to spiral into liquidation.

Under the Australian Corporations Act 2001 ('Act'), directors of distressed companies in Australia are at risk of personal liability (and even criminal liability) for insolvent trading if the company subsequently fails and goes into liquidation. The threat of liability, combined with uncertainty over the precise moment a company becomes insolvent, encourages directors to have the company enter into voluntary administration even if the company might be viable with a restructure. Current laws limit a director's capacity to navigate through turbulent times and discourage healthy risk taking due to the threat of personal liability. The consequent (and often premature) appointment of voluntary administrators is very often value destructive for the company.

The use of ipso facto clauses allows suppliers and other contractual counterparties to immediately cease supplying a business, or otherwise exercise rights under a contract, if the company enters into a formal insolvency process, such as voluntary administration. The exercise of ipso facto rights can severely hamper a company’s continued business operations, and can result in the company ceasing as a going concern.