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Encouraging innovation through insolvency reform

Pensive director working at desk

Current Insolvency provisions under the Australian Corporations Act impose a duty on Directors not to trade while insolvent, but also not to trade in a manner that will lead it to insolvency.

Although this may not appear too onerous an obligation, it can actually be trickier than it seems.  Some companies regularly flirt with insolvency, particularly if they trade in commodity prices or on the foreign exchange.  The same can be said for directors who, in the pursuit of innovation, lead their company into unknown territory.

The personal liability provisions under the existing insolvency framework in Australia means directors may be unwilling to take the necessary risks in order to truly innovate, and risk aversion among company directors in Australia is significantly higher than other OECD countries.

The Senate Economics References Committee has recently released its long awaited Innovation Report.  The Report identified several barriers to innovation and made recommendations with a view to creating a long term strategic framework to support innovation in Australia.

In a swift response to the Report, the Government has outlined 28 significant new initiatives, including Insolvency Reform.

The Insolvency Reform intends to make three significant changes:

  • Reduce the current default bankruptcy period from three years to one year;
  • Introduce a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser; and
  • Make ‘ipso facto’ clauses, unenforceable if a company is undertaking a restructure. This will allow companies to continue to trade and derive the benefit of the contract while they innovate.

The proposal paper will be released early in 2016 and will attempt to strike a balance between protecting creditors and encouraging entrepreneurship.

The new laws, which would apply to all companies, could unleash innovation by established businesses whose directors may currently feel constrained by Australia’s existing insolvent trading laws.

Australia’s existing bankruptcy laws can deter very experienced people from joining the boards of organisations that they could add a lot of value to.

It is very intimidating to put your assets at risk, but with these innovations in the law we should hope to see more willingness to act on boards, bringing in previously untapped knowledge resources. For some organisations this knowledge is more valuable than money.

About the author:

You Legal_Sarah Bartholomeusz_CEO & Senior Lawyer..Sarah Bartholomeusz is the founder and CEO of You Legal, a new category of law firm that provides leaders in growing companies with the confidence they need to make bold decisions in their businesses.  In 2015 You Legal was the winner of the Telstra Business Women’s Award in the Start-Up category for South Australia.