The operation of section 133 

The law currently provides an easy out for trustees of a bankrupt, specifically in respect of real property  

Section 133 of the Bankruptcy Act 1966 (Cth) (the Act) provides an option for the trustee in bankruptcy to disclaim real property where it is burdened by onerous covenants. This disclaimer is often exercised where the amount owed in the form of a mortgage and further caveats or covenants registered on title of the real property exceeds the value of the property.  

The new ipso facto regime applies to all contracts to be entered into on or after 1 July 2018. Businesses should now be carefully reviewing the effect of that regime on their contracts and whether any of their contracts may be exempt under the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 published on 24 June 2018.

The types of contracts excluded from the new ipso facto stay

From next week the much hyped stay on ipso facto rights in certain contracts will be law. The relevant Legislation, Regulations and Declarations1 commence this Sunday, 1 July 2018.

"Ipso facto" amendments to the Corporations Act - what does this mean and what impact does it have on your contracts from 1 July 2018?

Overview

Commercial contracts commonly include a term which permits one party to exercise certain contractual rights (including the right to terminate) if the other party is either insolvent or at the risk of becoming insolvent. Such clauses are commonly called “ipso facto” clauses.

Introduction

The statutory demand is a formidable card up a creditor’s sleeve that can result in a company being deemed to be insolvent if it does not pay the creditor’s debt within 21 days of service of the demand. Whether a statutory demand served on an incorporated body other than an Australian company will be effective largely depends on the State or Territory in which the incorporated body is based and whether it is served pursuant to the correct section of the Corporations Act 2001 (Cth) (Corporations Act).

What is a statutory demand?

In the recent decision of Heavy Plant Leasing [2018] NSWSC 707, a creditor successfully defended an unfair preference claim by establishing it did not have reasonable grounds to suspect the insolvency of the debtor company, who was a subcontractor in the earth moving business.

The most common way of defending a liquidator’s unfair preferences claim is to rely upon section 588FG(2) of the Corporations Act 2001(Cth); commonly called the ‘good faith defence’.

In September 2017, ‘safe harbour’ reforms to insolvency law were introduced to encourage directors to engage in a course of action early that is reasonably likely to achieve better outcomes for companies than immediate administration or liquidation. However, the existence of a safe harbour may not be enough if shareholders are locked into an intractable dispute.

In Short

The Background: The administrators of an Australian auction house and gallery business applied to the Federal Court of Australia for directions to recover in excess of $1 million in fees and costs incurred with respect to performing a stocktake of the auction house's inventory and returning consigned goods to owners.

The Issue: Did an equitable lien exist over the consigned goods in favour of the administrators for their fees and costs and, if so, could the administrators recover those fees and costs?

InLongley v Chief Executive, Department of Environment and Heritage Protection [2018] QCA 32, the Queensland Court of Appeal has clarified the ability of liquidators to disclaim onerous property, including obligations that arise in respect of that property under State environmental legislation.