When a company goes bankrupt, it can be a huge knock for the directors. Previously, you would have to remain bankrupt for three years, and you may be on the National Personal Insolvency Index permanently. There are ways around this – for example, debt agreements – but bankruptcy is a fact of life for many Australians.
However, new changes from the Federal Government aim to reduce the bankruptcy period, which might get you back on your feet faster. What has changed?
The work in progress
The Federal Department of Innovation launched the Improving Bankruptcy and Insolvency Laws Proposals Paper on April 29 this year. It included some huge changes to the way corporate restructuring and bankruptcy work, in order to get entrepreneurs and business owners back into the market faster, rather than discouraging further activity. The adjustments suggested are as follows:
- Shrinking the default period of bankruptcy from three years to one year,
- Inhibiting the operation of "ipso facto" clauses, which operate to automatically terminate contracts when an insolvency event occurs – meaning if a turnaround and restructuring occurs, contracts remain in place, and
- Providing a safe harbour period for directors to avoid personal liability for insolvent trading while a company undergoes a turnaround and restructuring process.
These amendments are intended to allow company directors a better opportunity to put restructuring measures in place to preserve their business or its assets, and even return from bankruptcy in a shorter period of time if their efforts are not successful or they cannot avoid personal liability for guarantees. It is further evidence that insolvency, while serious, is not the end of the line and there is a focus on moving towards better outcomes for struggling businesses in Australia.
Coming back stronger
There was a total of 29,055 insolvent debtors throughout 2015.
According to the Australian Financial Security Authority (AFSA), there was a total of 29,055 insolvent debtors throughout 2015. This figure includes bankruptcies, debt agreements and personal insolvency agreements. While lower than in previous years, this is still a significant number of local people facing financial difficulty.
Under the new Federal changes, the Department of Innovation thinks business owners will be incentivised to take more risks, make bolder decisions, and commit to great ideas. Bankruptcy doesn't have to be the end of your career as a company director, and the reduction of the bankruptcy timeframe to one year may benefit those entrepreneurs seeking to innovate and develop new business areas.
In the meantime, until these amendments are introduced, early pre-insolvency advice, and properly structuring your business and personal financial affairs may mean you do not have to deal with bankruptcy at all. At Cactus Consulting, our qualified professionals have years of experience helping people with financial difficulties to deal with their debts and often avoid bankruptcy altogether. Get in touch to find out more.