Bank-friendly insolvency regime challenged by new laws

Australia's corporate insolvency laws are among the most favourable to banks in the world, but this mantle could be threatened by looming changes to wrestle power away from lenders.

The federal government is expected to soon publish legislation it hopes will "reduce the stigma associated with business failure", and one aspect of this will be an overhaul of insolvency laws.

Of particular relevance to banks, changes proposed in an exposure draft of the legislation would make it much harder for lenders to appoint receivers, which act on behalf of banks in taking charge of troubled companies.

The banking industry's peak body and National Australia Bank, the largest lender to small businesses, are warning that may make banks less likely to lend against business assets.

In its draft legislation, the government has proposed that "ipso facto" clauses, which allow contracts to be terminated because of insolvency, would become unenforceable where a company is in a restructure.

Tim Klineberg, a restructuring and insolvency partner at King & Wood Mallesons, said there was a risk that as drafted, the "ipso facto" rules would make it more difficult to banks to appoint receivers to a company in financial distress, as a way of controlling a borrower's assets.

Historically banks have had extensive powers to appoint receivers, making Australia one of the most bank-friendly jurisdictions in the world.

"For banks dealing with insolvent borrowers in Australia, one of the most important powers is receivership which is not used as much overseas," Mr Klineberg said.

"With the current draft reforms, the balance is tipping away from the banks and towards borrowers, directors and other parties.

"What 'ipso facto' will do is it will mean that all these rights that they have today will be unenforceable for a period of time. What that means is banks won't have the same powers to take control of situations in the way they do today."

The government, which launched the laws as part of its innovation agenda, argues its changes will mean "ipso facto" clauses can no longer be used to stop successful restructures. But banks argue they could lead to higher credit costs for business customers.

The Australian Bankers' Association warned of "significant changes in the Australian commercial secured lending landscape", saying the proposed laws would "significantly undermine" the ability of secured creditors - banks - to appoint receivers.

It said that as a result, lenders could hit business customers with a "material" increase in the cost of debt, and riskier businesses may find it harder to attract finance.

NAB's submission to Treasury said the bank was "concerned that some of the changes will impact a lender's ability to ensure that their security is not diminished".

There was a risk banks would become less willing to provide cashflow lending against business assets, NAB's submission said.

In contrast to the banks' concerns, the Australian Private Equity and Venture Capital Association backed the proposed "ipso facto" changes. Current laws meant that some businesses in stress were unable to stay afloat, even if they were viable over longer term, it said.

Another, less controversial, part of the insolvency changes is to give directors a "safe harbour" from personal liability for trading while insolvent.

The risk of being sued for insolvent trading is a key reason why directors appoint administrators, lawyers say, and the government hopes to prevent administrators being appointed "prematurely".

The story Bank-friendly insolvency regime challenged by new laws first appeared on The Sydney Morning Herald.

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