This week’s TGIF considers In the matter of Arrium Limited [2018] NSWSC 747 in which the Court granted creditors access to documents produced in public examinations.

What happened?

Phoenixing involves stripping and transferring the assets out of a company, leaing it to perish in a blaze to avoid paying its liabilities. A new company is then reborn from the ashes of the old company, starting anew and liability free, however usually with the same assets and business as the old company.

From a public policy standpoint, phoenixing activity is harmful to the economy as a whole. Creditors are often left with nothing and employees are left short-changed.

What are the reforms?

For many suppliers, creditors and landlords, the threat of their counterparty’s insolvency is mitigated by a right to terminate or vary their contracts if there is an “insolvency event”. From July 1 2018 changes to the Corporation Act 2001 (Cth) may, however, limit those rights.

For company directors, the threat of personal liability for debts incurred in periods of actual or potential insolvency looms large. The creation of the ‘safe harbour’ provisions in the Corporation Act 2001 (Cth) that took effect in September 2017 may provide some welcome relief to company directors in periods of financial distress.

Following recent changes to the Corporations Act 2001 (Cth), parties to a contract may be unable to rely on a contractual right to terminate or modify the operation of a contract on the occurrence of certain insolvency-related events of a counterparty to the contract (commonly known as an “ipso facto” provision).

In June we published our JMAlert that outlined how ipso facto reforms will affect commercial contracts entered into after 30 June 2018, click here to view the article.

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.