Some of the most far-reaching Australian insolvency law changes are taking effect. These new laws will restrict the enforceability of a whole class of common clauses in contracts –so called 'ipso facto' clauses.
In this edition of FINSights, we explore what these changes mean for financiers, and outline key tips and issues they should consider as we move forward into the new regime.
What are ipso facto clauses?
Introduction
In late 2015, the High Court handed down its decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48. The High Court held (by a majority of 3:2) that, in the absence of an assessment, a liquidator is not required to retain funds from asset sale proceeds in order to meet a tax liability which could become payable as a result of a capital gain made on the sale. In doing so, the majority of the High Court affirmed the decision of the Full Federal Court and provided long awaited guidance to liquidators, receivers and administrators.
On 28 March 2017, the Australian Government announced its proposals to reform the law relating to insolvent trading, and the right to terminate contracts based on insolvency ('ipso facto clauses'). MinterEllison made a detailed submission on the proposals which can be found here.
The U.S. Supreme Court recently scrutinized the proper application of the safe harbor found in Section 546(e) of the U.S. Bankruptcy Code1 in Merit Management Group, LP v. FTI Consulting Inc.2 While the Supreme Court's decision narrowed the reach of the safe harbor, it did little to change the landscape for the multi-billion dollar U.S. structured finance industry, including warehouse lending.
On February 27, 2018, the United States Supreme Court in a significant ruling held in Merit Management Group, LP v. FTI Consulting, Inc. that transfers of property of a debtor in which financial institutions are mere conduits or intermediaries may be avoidable. The Court ruled that the safe harbor provisions of section 546(e) of the Bankruptcy Code do not protect such transfers from avoidance.
The Bankruptcy Code prohibits a chapter 13 debtor from modifying a mortgage lien on the debtor's principal residence. Even in situations in which a secured creditor fails to file a proof of claim or otherwise participate in the bankruptcy proceeding, the Bankruptcy Code allows a secured creditor's lien on a primary residence to pass through the bankruptcy unaffected. However, a recent decision from a bankruptcy court in Texas illustrates the risks to secured creditors of blind reliance on these statutory protections.
In March of this year, consumer electronics and home appliance retailer Gregg Appliances, Inc., better known as H.H. Gregg, filed for Chapter 11 bankruptcy in Indianapolis, Indiana. H.H. Gregg, which took over many of the retail spaces previously occupied by Circuit City, is one of many big-box retailers that have sought Chapter 11 bankruptcy over the past several years. Like Circuit City, H.H. Gregg was unsuccessful in reorganizing in bankruptcy and is now seeking to recover payments made to vendors and other creditors within 90 days prior to the bankruptcy filing.
In MF Global Holdings Ltd. et al. v. Allied World Assurance Co. Ltd. et al., No. 1:16-ap-01251 (Bankr. S.D.N.Y. Aug. 24, 2017), the United States Bankruptcy Court for the Southern District of New York ordered MF Global Holdings Ltd. and Allied World Assurance Co. Ltd. to arbitrate their $15 million errors-and-omissions coverage dispute in Hamilton, Bermuda.
On July 19, 2017, the Third Circuit Court of Appeals issued an opinion in Arrow Oil & Gas, Inc., et al. v. J. Aron & Company, et al.(In re Semcrude, L.P., et al.), Case Nos. 15-3094, 15-3095, 15-3096 and 15-3097, affirming the Delaware bankruptcy court and district court, holding that upstream oil producers do not have an automatically perfected statutory security interest in oil sold even if Texas or Kansas law applied.