Can I trade whilst insolvent?

We have recently seen the introduction of reforms to Australia’s insolvency laws. Malcolm Turnbull has spruiked the changes as a major win for the economy and for directors of firms under trading pressure. They are seen as a positive first step in achieving a much-needed overhaul of Australia’s outdated Director liability framework.

Considered as support for Directors to take the necessary risks to innovate, the changes provide recognition that in pursuing new ideas and opportunities, some businesses will fail.

The reforms announced by the Federal Government include:

• Directors currently hold personal liability for insolvent trading.  The overhaul will see the introduction of a ‘safe haven’ for
• Directors if they appoint a restructuring adviser to develop a plan to transform the company to solvent trading;
  allowing contracts to be terminated solely due to an insolvency event. These ‘ipso facto’ clauses are unenforceable if a company is undertaking a restructure; and
• A reduction to the default bankruptcy period from 3 years to 1.

The introduction of these reforms are intended to allow a large numbers of viable Australian companies to trade through difficult times. Saving tens of thousands of jobs and billions in wealth of the individuals involved.

However, there are warnings regarding these new laws:

• Laws will make it easier to recover from business failure, but will it encourage rouge operators?
• What protections will be offered to creditors affected by bankruptcies and administrations going forward?
• Will lenders become more conservative in their dealings with business, especially start-ups?

It would appear that these laws could potentially benefit those who use bankruptcy and insolvency laws to avoid paying creditors. How the laws will distinguish between law-abiding business people and shifty operators will be interesting to observe in the future.

The Federal Government has released an Innovation Statement with spending of $1.1b over four years, which included 28 new initiatives, a few of particular interest are:

• ‘Angel’ investors will now receive tax concessions;
• The introduction of a new entrepreneurs visa to encourage foreign entrepreneurs to move to Australia;
• Employee share scheme disclosure requirements will require changes;
• The creation of a Cyber Security Growth Centre;
• Increased funding will be directed to many areas, particularly science, technology, engineering and mathematics (STEM) for education and skills development;
• New laws that make it simpler to access crowd-sourced equity funding; and
• Tax treatment changes will be introduced to Early Stage Venture Capital Limited Partnerships (ESVCLPs) to attract more investment into start-ups.

There are a number of additional initiatives and framework that surround the insolvency reforms. To find out how this may benefit you and your business, contact a Modoras Accountant today.

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