With the rise of Australia’s “Start-up culture”, the Australian Government has recently looked at various measures to promote and support Innovation and Entrepreneurship.
Most small to medium enterprises (SME’s) fail within the first three years of operation. This can be due to many reasons such as:
*Lack of working capital
*No Strategic direction
*Lack of cash flow management
*No record keeping
Due to the Government’s support for business in Australia, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Enterprise Act) was passed in September 2017 and introduced two key inclusions to the Corporations Act 2001 (Corporations Act):
- Safe Harbour from insolvent trading – This helps provide a legal framework for directors leading to better outcomes for the company and its creditors while providing protection from being pursued personal liability for insolvent trading.
- A Stay on enforcing rights due to arrangements or restructures –This relates to ipso facto rights in contracts/agreements.
Ipso facto Reforms
Why are these reforms important and what are the effects for parties to contracts moving forward?
Contracts with third parties often what allows its trade, with contracts for suppliers, utilities, and land. Ipso facto clauses allow counterparties to terminate or modify a contract if a company becomes insolvent.
This reform will make ‘ipso facto’ clauses unenforceable while a company is attempting to restructure under:
- voluntary administration;
- scheme of arrangement; or
- a managing controller has been appointed to the company property.
This creates new benefits for the restructuring a company through an insolvency regime and may improve the potential return to creditors by the company getting better value from its assets.
The reforms only affect the rights under contracts, agreements, arrangements entered after 1 July 2018 onwards.
The success of these new provisions will take time to prove their worth in helping businesses take more risk and calculated measures. If you want to know how these reforms may affect you, contact the 24/7 CRS Insolvency Services hotline on 1800 210 073 to receive free and impartial insolvency advice today.