Improving insolvency laws to encourage innovation
More often than not, entrepreneurs will fail several times before they make it and will usually learn a lot in the process. To help these entrepreneurs to succeed will require a cultural shift. We need to encourage Australians to take a risk, leave behind the fear of failure and be more innovative and ambitious.
Concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason early stage (angel) investors are reluctant to get involved in a startup. Our current insolvency laws put too much focus on penalising and stigmatising the failures, so we’re making some changes to those laws.
What is changing?
We’re striking a better balance between encouraging entrepreneurship and protecting creditors by:
- Reducing the current default bankruptcy period from three years to one year.
- Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company.
- Making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.
When is it happening?
The Improving Bankruptcy and Insolvency Laws Proposals Paper was released on 29 April 2016. Submissions close on 27 May 2016.
What to do
- To find out more information about the changes, visit The Treasury website.
- To keep updated on the progress of the changes initiative, sign up to the email update service.
- Learn about other Agenda initiatives for business.
How will this work in practice?
Minivit Pty Ltd produces multivitamins. In light of the growing demand for its products, the company buys new machinery to upgrade its factory and expand its production capacity. Unfortunately, the ship due to carry the new machinery has technical difficulties and is delayed by nine months. The company develops an acute but temporary cash flow problem. The directors are concerned that they may breach the insolvent trading rules.
Scenario under existing law
The directors are so concerned about personal liability and reputational damage from breaching the law they place the company in voluntary administration. A key supplier terminates a contract exercising an ipso facto clause, effectively destroying the company’s business and resulting in liquidation.
Scenario after new measures introduced
The company appoints a professional restructuring adviser who arranges new credit facilities to address the temporary cash flow problem, and restructures the company to focus on online sales. There is protection for directors because of the safe harbour and because ipso facto clauses are unenforceable. Minivit is able to continue its business successfully.
Information courtesy http://www.innovation.gov.au/