Federal government urged to overhaul insolvency laws following major review

The Federal government is being urged to overhaul the country’s insolvency laws to cater to “unprecedented” business changes following a review of “safe harbour” laws.

Ms Genevieve Sexton, Arnold Bloch Leibler restructuring and insolvency partner and chair of the review of the Insolvent Trading Safe Harbourlaws. Source: Supplied.

Australia’s insolvency laws need comprehensive review, a panel set up to examine safe harbour protections for businesses has recommended.

The call is among 14 recommendations to the federal government by the review of the Insolvent Trading Safe Harbour legislation that protects directors trading while insolvent, as long as there are genuine efforts to restructure that will lead to a better outcome for the company.

“More than 30 years have passed since the release of the last comprehensive review of Australia’s insolvency laws; the Harmer Report,” said the review, published Thursday. Since then there had been “unprecedented globalisation, and immense changes to the ways in which Australia’s capital markets operate”.

The recommendation was one of five the government “noted”, while accepting the others, aimed mainly at clarifying the laws.

The review said it was important that Australia’s overall insolvency laws remained “fit-for-purpose and consistent with community expectations about how a company was to be governed and managed at each stage of its life cycle.

“A comprehensive review that not only considers the past 30 years of jurisprudence on our current insolvency regime, but also assesses the impact of our insolvency laws on our trading partners, on domestic and international capital markets and other economic and social factors, would be a significant and invaluable development.”

The government response said it had an extensive agenda to improve the insolvency provisions for all Australian businesses and referred to measures for small business introduced at the start of last year, reforms to creditors’ schemes of arrangement and consultations on clarifying the treatment of corporate trusts in insolvency.”

The safe harbour review chair, Arnold Bloch Leibler restructuring and insolvency partner Genevieve Sexton, said the need for a review of the broader insolvency legislation had been a “consistent message” both in submissions the panel received and in roundtable discussions about the safe harbour laws.

“We recognise that the government is doing a lot in this space,” she said. “I just caution against what I call a piecemeal response, rather than having someone look back and look at it as it all fits together. I’ll continue to advocate for it because so many people were asking for it through the course of this review.”

Overall the safe harbour review found the legislation, a carve out to the underlying prohibition on insolvent trading in the Corporations Act, was fit for purpose.

“However it’s not well understood, and I think there needs to be a lot of education in respect of how it can be applied,” Ms Sexton said.

She was particularly pleased the government had accepted a recommendation that Treasury write a plain English guide to the legislation, in consultation with key industry groups.

“This is ultimately a governance tool for companies and directors for best corporate behaviour. Directors need to understand some really complex, difficult concepts in order to understand their personal liability.”

The safe harbour provisions were aimed at providing an incentive for directors of companies that were in difficulty to take advice early on how to turn their businesses around, heading off premature declarations of bankruptcy made solely to avoid personal liability.

The rules were brought in as part of the National Innovation and Science Agenda, in a bid to support a culture of “entrepreneurship and innovation” and as a practical means of relieving financial distress.