Australia: Safe harbour defence unveiled: insolvency law reform to save businesses and jobs

Services: Banking & Finance, Corporate & Commercial, Intellectual Property & Technology, Restructuring & Insolvency
Industry Focus: Financial Services, Insurance, Life Sciences & Healthcare, Property

What you need to know

  • The Federal Government has released long-anticipated draft legislation making key changes to insolvency laws in Australia.
  • The proposed changes affect directors' liability for insolvent trading, as well as 'ipso facto' clauses.
  • We unpack and put the proposed changes in context, look ahead to the changed insolvency landscape for directors and restructuring advisers, and call for Federal Parliament to support these important reforms as they will assist with the successful restructure of businesses and ultimately save jobs.

Australia's current insolvent trading laws and lack of protection against 'ipso facto' clauses can make certain restructurings and workouts far more difficult than they need to be. Reform is necessary to ensure Australian businesses maintain a commercial edge in a fast changing economy affected by digital and other disruption.

Co-author John Stragalinos has previously called for the Federal Government to reform Australia's onerous insolvent trading laws to foster innovation and encourage entrepreneurship. This update examines the proposed changes that were unveiled last week, after a long period of anticipation.

Corporate insolvency

Australia's current insolvent trading laws mean directors (including non-executive directors) face personal liability when their company is in severe financial difficulties and they are confronted with a necessary financial restructure. In recent years there has been a dramatic increase in restructures undertaken by restructuring and turnaround professionals in Australia drawing upon experiences in the USA and UK: for instance Alinta and McColl's Transport.

Currently directors must prevent their company from incurring debts where the company is insolvent, or becomes insolvent by incurring the debt and at that time, there are reasonable grounds for suspecting the company is insolvent, or would become insolvent. Failing to guard against insolvent trading may result in the director being personally liable for debts incurred while the company was insolvent.

On 28 March 2017, the Federal Government released draft legislation which proposes to:

  • create protection (a 'safe harbour') for company directors involved in restructuring a business by protecting them from personal liability for insolvent trading claims under certain conditions
  • make 'ipso facto' clauses unenforceable.

Safe harbour from insolvent trading

In short, if directors take appropriate steps, such as obtaining expert advice and preparing a restructure plan that is reasonably likely to lead to a better outcome than an insolvency appointment, they can protect themselves from liability for insolvent trading.

Under the proposed reforms, directors will enjoy protection (a safe harbour) if they take a course of action that is reasonably likely to lead to a better outcome for the company and the company's creditors as a whole than proceeding to immediate administration or liquidation. The inclusion of certain conditions (eg the need to maintain books and records and provide for employee entitlements) should help guard against abuse of the provisions.

In determining whether a course of action is reasonably likely to lead to a better outcome for a company and its creditors, the following actions by directors may be considered:

  • taking appropriate steps to prevent misconduct by officers or employees
  • obtaining appropriate advice from a suitably qualified adviser who was given sufficient information to give appropriate advice
  • taking appropriate steps to ensure the company is keeping appropriate financial records
  • properly informing themselves of the company's financial position
  • developing or implementing a restructuring plan to improve the company's financial position.

It is not necessary for all factors to apply and other matters may be considered. One would expect that seeking appropriate advice will become an important factor in practice.

In our view, the proposed safe harbour reforms should provide numerous benefits by:

  • encouraging directors to engage early and seek appropriate advice from a restructuring/ turnaround expert to form a restructuring plan, rather than placing their company prematurely into administration
  • allowing directors to trade through financial difficulties and take reasonable risk as they embark on a restructure without the fear of personal liability
  • providing the company and its stakeholders (financiers, employees, creditors and shareholders) with time to prepare and implement a restructuring plan without the threat of the directors being forced to place the company into administration due to their personal exposure
  • providing a company's restructuring advisers and key stakeholders time to prepare and implement a restructuring plan
  • avoiding the value destruction that occurs with the appointment of an administrator or receiver.

Ipso facto clauses

In broad terms, an ipso facto clause allows one party to terminate or modify the operation of a contract upon the occurrence of a specific event (eg the appointment of an administrator).

Ipso facto clauses can lead to the destruction of value in a restructuring and prevent the successful sale of a business as a going concern. The proposed changes to the enforcement of ipso facto clauses will assist in restructuring businesses in financial trouble.

The proposed legislation applies to stay the enforcement of ipso facto clause rights in relation to:

  • a relevant entity that applies for a scheme of arrangement or compromise
  • companies that enter into voluntary administration.

The stay will apply regardless of whether the right to terminate or amend the contract is self-executing or triggered by one of the parties to an agreement. The courts will have the discretion to allow a right to be enforced if doing so would be in the interests of justice.

Subject to a court ordering otherwise, the stay on ipso facto clauses will have no impact on a party's right to terminate a contract for any other reasons, for instance, a breach for non-payment. The courts will have the discretion to restrict such enforcement if it appears likely those rights will be exercised merely because of an insolvency event.

Importantly, the Federal Government has indicated that the changes will not affect some contracts and instruments, including bank loan documents and other financial products (eg swaps).

What should directors do now?

Reform to Australia's insolvent trading laws and ipso facto provisions are very important in the current climate of business disruption. We call upon Federal Parliament to support these important reforms as we strongly believe they will assist with the successful restructure of businesses and ultimately save jobs.

In the meantime, regardless of whether the proposed reforms are passed or not, the message to directors of a company in financial difficulty is simple:

Act early.

If a company is in financial difficulty due to changes in economic conditions, disruption from a new competitor or poor decisions being made, the board of directors should be proactive and act early. Directors should obtain appropriate advice from a turnaround/ restructuring expert and engage with their stakeholders. This will maximise the chance of a successful restructure and minimise the risk of liability for insolvent trading.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Corrs Chambers Westgarth
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Corrs Chambers Westgarth
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions