The Australian Federal Government's controversial ipso facto stay regime took effect on 1 July 2018.
The regime affects the ability of a contractual party to exercise rights, such as termination rights, that are triggered by the counterparty becoming insolvent. The ipso facto stay applies to all new contracts that are not carved out under the regime.
Australia’s new ipso facto regime is now in effect. It stays the enforcement of contractual rights triggered upon the entry of a corporate counterparty into certain restructuring and insolvency processes. The regime will affect a broad range of contracts entered into on or after 1 July 2018; however, certain contracts and contractual rights have been excluded from the operation of the stay pursuant to statutory instruments which have just been issued.
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 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.
Over a nine month period to July 2018, amendments to the Corporations Act come into force which significantly limit the ability of corporate parties to rely on an ‘insolvency event’ to modify or terminate their contracts entered into after that date.
Treasury has released draft regulations and a draft declaration for public consultation. The regulations and declaration support the stay on enforcement of ipso facto clauses against relevant entities. Ipso facto clauses allow parties to enforce a right, and terminate or amend a contract, when their contractual counterparties have entered into formal insolvency, regardless of the counterparties continued performance of their obligations under the contract.
This week’s TGIF considers the case of In the matter of Specialist Australian Security Group Pty Ltd (in liq) [2018] VSC 199 in which the Court considered the priority of administrators' right to an indemnity out of company property.
Background
Following the implementation of the Safe Harbor protections introduced last September, new changes to the Corporations Act 2001 come into force on 1 July 2018, significantly limiting the ability of parties to rely on insolvency as a means to terminate a contract. These changes intend to help facilitate the restructure and turnaround of struggling companies and are being hailed by insolvency practitioners as a long overdue softening of existing insolvency laws.
In the recent case of Cash Generator Limited v Fortune and others [2018] EWHC 674 (Ch), the Court determined that non-compliance with the deemed consent procedure for nominating liquidators did not invalidate their appointment. The case provides a useful summary on the relatively new provisions governing the deemed consent procedure and welcome relief to Insolvency Practitioners (“IPs”) that a failure to fully comply with such provisions will not necessarily invalidate their appointment.
Brief facts and arguments
Stakeholders have until 11 May 2018 to comment on a key part of the new ipso facto regime – the exceptions to the statutory stay on ipso facto clauses in certain categories of contracts and rights.
The new insolvency legislation commencing 1 July 2018 (Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017) introduces a statutory stay on the exercise of contractual rights arising by reason of certain insolvency trigger events.