House of Representatives

Second Reading Speech

Mr McCormack (Minister for Small Business)

I move:

That this bill be now read a second time.

This bill amends the Corporations Act 2001to improve Australia's corporate insolvency system.

Firstly, it will create a 'safe harbour' for honest and diligent company directors from personal liability for insolvent trading if they are pursuing a restructure outside formal insolvency.

Secondly, 'ipso facto' clauses, which may allow the termination or variation of contracts based on a company's financial position or the commencement of certain insolvency proceedings, will become unenforceable during and after certain formal insolvency procedures.

Our current insolvent trading laws put too much focus on stigmatising and penalising failure. As part of the National Innovation and Science Agenda, these reforms aim to promote entrepreneurship and innovation to drive business growth, local jobs and global success.

The threat of Australia's insolvent trading laws, combined with uncertainty over the precise moment a company becomes insolvent have long been criticised as driving directors to seek voluntary administration even in circumstances where the company may be viable in the longer term. Concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason that early stage-angel-investors and professional directors are reluctant to become involved in a start-up.

Broadly, the safe harbour and ipso facto measures encourage Australians to take a risk, leave behind the fear of failure and be more innovative and ambitious. More often than not, entrepreneurs will fail several times before they experience success and will generally learn valuable lessons during the process. Helping these entrepreneurs to succeed requires a cultural shift.

The amendments in part 1 of this bill create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. This will drive cultural change among company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company's recovery instead of simply placing the company prematurely into voluntary administration or liquidation.

An 'ipso facto' clause is a provision that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty. The operation of these clauses can reduce the scope for a successful restructure or prevent the sale of the business as a going concern.

The amendments in part 2 of this bill will make certain contractual rights unenforceable while a company is restructuring under certain formal insolvency processes.

This reform is aimed at enabling businesses to continue to trade in order to recover from an insolvency event instead of these clauses preventing their successful rehabilitation.

Together, these amendments will reduce instances of a company proceeding to a formal insolvency process prematurely. Where companies do enter into particular formal insolvency procedures, they will have a better chance of being turned around or of preserving value for creditors and shareholders

This in turn will promote the preservation of enterprise value for companies, their employees and creditors, reduce the stigma of failure associated with insolvency and encourage a culture of entrepreneurship and innovation.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.