‘The statutory regime that governs the realm of corporate insolvency and personal bankruptcy has long been a point of contention between the business community and regulators, a balancing act that each side felt too often erred in favour of the other. The recently published recommended changes to Insolvency Laws, introduced as part of the Commonwealth’s National Innovation & Science Agenda, foreshadow a ‘cultural shift’ in this regard, but gave scant detail as to what the Government is actually proposing to do.¹ At this stage, all we know is that it wants to strike “a better balance between encouraging entrepreneurship and protecting creditors by:
• Reducing the current default bankruptcy period from three years to one year;
• Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turn around plan for the company;
• Making ‘ipso facto’ clauses [allowing contract termination for insolvency] unenforceable if a company is undertaking a restructure.” ²
A proposal paper will be released in the first half of 2016 with legislation to follow by mid-2017; and so we are, for the present, left to anticipate what will be offered.
Whether or not the changes are retrospective, it will be the existing contractual arrangements and structures that you have in place when these laws come into effect which will determine the degree to which you, as a creditor, are affected and to what extent you “lose” as a consequence of any
“loosening” of the rules.
The core answers to mitigating potential loss when dealing with persons or corporations facing insolvency remain unchanged:
1. Know who you are trading with;
2. Make sure any credit terms are tight, tidy and capable of enforcement;
3. Take security – hold guarantees, charges and make sure those interests
are registered; and
4. Keep your debtor balances within a manageable range – overextending credit increases your problem and postpones theirs.
The unforeseen losses suffered by traders whose clients fail to pay a debt have a flow on effect and, as the economy tightens, the effect becomes more so. Pre-empting risk is what good “innovators” do, and steps should be taken to protect your valuable cash flow.
It is encouraging that the Government might introduce changes that allow corporate restructures before that step into the great unknown of “Administration” or “Liquidation”, but for most of us, we need to remain vigilant in reducing the risk we might otherwise unwittingly assume through our associates’ risk taking behaviours.
If you want more information about debtor management, visit our website for our free e-book at www.bradleyallenlove.com.au.
1 http://www.innovation.gov.au/page/agenda (released 8 December 2015).