Vol 13 (2016) - Issue 4

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Proposed Reforms to Australia’s Personal and Corporate Insolvency Laws: Striking a Balance Between Encouraging Entrepreneurship and Protecting Creditors

On 29 April 2016, the Australian Government released a much-anticipated Proposals Paper ('Proposals Paper') entitled 'Improving bankruptcy and insolvency laws' seeking submissions from the public on the reforms by 27 May 2016. The Proposals Paper outlines three measures to improve Australia’s bankruptcy and insolvency laws ('Proposed Measures'). First, it puts forward a reduction in the current default bankruptcy period from three years to one. Secondly, it proposes the introduction of a 'safe harbour' for directors and, finally, it proposes constraints on 'ipso facto' clauses rendering them unenforceable during a restructure. The Proposals Paper comes at a time of similar proposed reforms elsewhere, with the UK’s Insolvency Service releasing a consultation on options for reform to the UK’s corporate insolvency regime on 25 May 2016. This article gives a brief overview of the Australian Government’s recent proposed reforms. Cognisant of Australia’s federal election on 2 July 2016, practitioners are hopeful this will not impede progress of these legislative reforms.

Background to the reforms
The Proposed Measures form part of the Australian Government’s National Innovation and Science Agenda ('Agenda'). With Australia’s mining boom at an end, the Australian Government is intent on focussing attention on new sources of economic growth. Innovation and entrepreneurship are central to this initiative. As set out in the Proposals Paper, the Proposed Measures are aimed at improving Australia’s bankruptcy and insolvency laws in order to 'strike a better balance between encouraging entrepreneurship and protecting creditors'. The purported aim is to reduce the stigma associated with business failure by creating a cultural change – shifting the focus from penalising business failures to creating an environment that encourages Australians to embrace risk and enables entrepreneurs to succeed.
In recent years there has been substantial debate by practitioners and discussion in the media in favour of a greater business rescue focus in Australia, as well as a number of government inquiries. It is significant that the last comprehensive reform of Australia’s personal and corporate insolvency laws arose out of the Harmer Inquiry in the 1980s. Consequently the Proposals Paper has received much attention.