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How will this work in practice?
Minivit Pty Ltd produces multivitamins. In light of the growing demand for its products, the company buys new machinery to upgrade its factory and expand its production capacity. Unfortunately, the ship due to carry the new machinery has technical difficulties and is delayed by nine months. The company develops an acute but temporary cash flow problem. The directors are concerned that they may breach the insolvent trading rules.
Scenario under existing law
The directors are so concerned about personal liability and reputational damage from breaching the law they place the company in voluntary administration. A key supplier terminates a contract exercising an ipso facto clause, effectively destroying the company’s business and resulting in liquidation.
Scenario after new measures introduced
The company arranges new credit facilities to address the temporary cash flow problem, and restructures the company to focus on online sales. There is protection for directors because of the safe harbour and because ipso facto clauses are unenforceable. Minivit is able to continue its business successfully.