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.
It was first published by the Governance Institute of Australia.
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.
This week’s TGIF considers the case ofMighty River International Ltd v Hughes, where the High Court upheld the validity of Holding DOCAs.
Case history
This case concerned the validity of a deed of company arrangement (DOCA) between Mesa Minerals Ltd (Mesa) and its creditors.
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.