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From next week the much hyped stay on ipso facto rights in certain contracts will be law. The relevant Legislation, Regulations and Declarations commence this Sunday, 1 July 2018.
This reform is part of a broader suite of amendments (including the introduction of the safe harbour) to the Australian insolvency regime that the Federal Government hopes will promote entrepreneurship, drive growth and reduce some of the stigma associated with insolvency.
The stay operates to prevent the termination or modification of a contract should the counter-party become subject to insolvency (either voluntary administration, receivership or a scheme of arrangement to avoid winding-up) and otherwise be performing its relevant contractual obligations. The previous operation of ipso facto clauses had the ability to reduce the scope for successful restructures or the sale of businesses as a going concern and also allow a counterparty to attempt to ‘green mail’ as part of negotiations.
Our earlier article identified the key points based on the drafts of the relevant legislation. Below we set out the final position, much of which is unchanged.
Some of the arrangements and contracts contained in R5.3A.50 of the Corporations Regulation 2001 that will not be subject to the ipso facto stay include:
The kinds of rights that will not be subject to the ipso facto stay include:
The stated purpose of the stay is to preserve value through restructures and promote going concern sales undertaken through an insolvency process (especially in contract heavy businesses). The legislature at the same time has taken a relatively broad stroke approach to the exclusions (many of which are commercially sensible and necessary).
Whether the right balance has been struck will be borne out during active restructures undertaken in the next 12 – 24 months. Each situation, or more accurately each contract, arrangement or agreement, will need to be examined closely against the legislative package as a whole when considering whether a restructure or sale / purchase is impacted.
We recommend discussing with JWS’s Finance and Restructuring team the drafting and structuring of any new contracts or potential enforcement actions relating to new contracts.
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