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Insolvency law reforms tipped to impact business contracts

Insolvency law reforms tipped to impact business contracts

The new financial year will mark “sweeping reforms” to insolvency rules, with a legal firm warning the impacts on new business contracts will be far-reaching.

Tax&Compliance Adam Zuchetti 09 May 2018
— 1 minute read

Last September, Financial Services Minister Kelly O’Dwyer flagged a softening of insolvency rules in a bid to reduce the number of businesses voluntarily entering or being pushed into insolvency prematurely.

Dan Creevey, principal of Queensland-based Creevey Russell Lawyers, said changes due to come into effect on July 1 this year will be a gamechanger for the business sector, particularly those who fall on the wrong side of a struggling third-party company.

“This is an attempt to shift corporate culture in Australia from what is currently viewed as one of risk avoidance and shame associated with failure, towards more of an entrepreneurship and innovation driven culture,” said Mr Creevey.

“The new laws are expected to change the negotiating dynamics as Australian companies approach distress, and in restructuring.”

According to Mr Creevey, the new rules will make a number of contractual rights “unenforceable”, including another party having a receiver or administrator appointed; and another party flagging or pursuing court action to force a compromise or scheme of arrangement with creditors to avoid liquidation.

“While this will impact on businesses across all industries, sectors such as the construction industry will be particularly affected as they rely on swift rights to terminate and replace contractors and suppliers who are insolvent and performing poorly,” Mr Creevey concluded.

He added that all businesses should carefully vet the financial security of all contractual parties before entering contracts from 1 July 2018.

ASIC figures revealed a notable decline in the number of business insolvencies last financial year, and that the majority of personal insolvencies are not due to business failures.

Insolvency law reforms tipped to impact business contracts
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