Devil in the detail – proposed exclusions from the Ipso Facto Stay

The introduction of legislation creating a stay on enforcement of ipso facto clauses was reported in our September 2017 article. However, the devil was always going to be in the detail, and in particular the type of rights and contracts excluded from the operation of the new law.

On 16 April 2018 Treasury released exposure drafts (which can be accessed here) of the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 (Regulations) and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 (Declaration). The Regulations relate to contracts, agreements or arrangements. The Declaration relates to kinds of rights. Each set out significant and wide ranging exclusions from the stay.

Key points

In our view, the proposed Regulations and Declaration outline commercially sensible exclusions from the operation of the stay. (Please note that there are in excess of 30 types of contracts, agreements, arrangements and 10 kinds of rights which are excluded). 

For example, the proposed Regulation 5.3A.50(2)(h) excludes from the stay an agreement for the sale of all or part of a business. That is, the vendor or purchaser which is not insolvent remains entitled to terminate the sale agreement. In our view, this is sensible.  The approach taken to this particular exclusion promotes the aim of the reform (while sensibly seeking to avoid unintended consequences). This attitude appears to have been adopted to all of the proposed carve outs, save that there will be the inevitable uncertainty, in some cases, about whether or not the contract, agreement, arrangement or right is one falling into these excluded categories.

Contracts not subject to stay

Other categories of contracts, agreements and arrangements that will not be subject to the ipso facto stay include:

• Arrangements relating to laws and international obligations;
• Government licences or permits;
• Arrangements relating to securities and financial products;
• Complex arrangements between sophisticated parties;
• Arrangements relating to debt and the ranking of creditors;
• Arrangements relating to financial markets, and clearing and settlement facilities;
• Netting arrangements; and
• Post 30 June 2018 contracts arising from variation, novation or assignment of a contract entered into before 1 July 2018.

Rights not subject to stay

The kinds of rights that will not be subject to the ipso facto stay include:

• Uplift clauses and indemnification;
• Termination rights in a standstill or forbearance arrangement;
• Rights to change the priority in which amounts are to be paid;
• Rights of set-off and acceleration of such rights;
• Rights of assignment and novation;
• Certain self-executing provisions; and
• Step-in rights.

The right to appoint a controller will also be excluded from the stay where certain circumstances are satisfied. This proposed carve-out recognises that contractual arrangements between parties as to the priority of secured creditors in insolvency events and the exercise of rights should not be disturbed, and prevents an outcome which promotes a race between creditors to appoint a controller.

Conclusion

The exposure drafts appear to have taken a commercially sensible approach to the proposed exclusions from the ipso facto stay. This approach provides breathing room for viable but financially distressed or insolvent companies by allowing continued operations (that is, prohibiting certain counterparties from seeking to terminate or hold the relevant entity “to ransom”) while the underlying business is restructured or sold for value, ultimately for the benefit of creditors. 

It is anticipated following the consultation period ending on 11 May 2018 that the stay, the Regulations and Declaration will commence on 1 July 2018.