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The new ipso facto regime and what it means for your contract

As part of the Federal Government’s reforms to Australia’s insolvency laws under the National Innovation Science Agenda (Agenda) to promote entrepreneurship and encourage innovation, a new ipso facto stay regime became applicable to contracts from 1 July 2018. A link to our previous article on this topic can be found here.

The ipso facto regime is now in effect. This means that the ipso facto stay currently applies to contract clauses which allow a party to enforce a right, and terminate or amend a contract, when a company has entered into a formal insolvency. This is regardless of the counterparty’s performance of its obligations under the contract.

The contractual rights also cannot be enforced against a company for the reason that it has come under (or is possibly coming under) administration or for a reason prescribed by the regulations.

There are certain contracts and contractual rights that are expressly excluded from the ipso facto regime to be aware of.

The below lists what contracts and contractual rights are specifically excluded from the ipso facto regime changes and that you should look out for.

EXCLUDED CONTRACTS

Excluded types of contracts – reg 5.3A.50 in the Corporations Regulations 2001 (Cth) (Regulations) lists certain contracts are excluded from ipso facto stay regime. The following list are contracts or agreements exempt from the ipso stay regime.

Government

  • A Commonwealth, State or Territory contract, agreement or arrangement that is a licence, permit or approval
  • Contracts relating to national security, defence or border protection
  • Supply or goods or services to (or on behalf of) public hospitals
  • Contracts critical to supply essential goods or services for Government

Debt and equity markets

  • Derivative and securities financing contracts
  • Underwriting issue or sale or securities, financial products, bonds, promissory notes or syndicated loan contracts
  • A contract where securities are offered or may be offered under a rights issue
  • Related to margin lending facility
  • Bond contracts
  • Contracts associated with the operating rules of a financial market or of a clearing and settlement facility
  • Any contracts with the Reserve Bank of Australia and the operator of a clearing and settlement facility

Special Purpose Vehicles (SPV)

  • Contracts which involve a SPV that provides for securitisation or a public-private partnership.
  • A SPV that provides for a project finance arrangement

Construction

  • Any contract, agreement or arrangement after 1 July 2018 (but before 1 July 2023) where the total payments under the contracts is at least $1 billion for the provision of work, goods or services for a particular project for:
  1. Building works (within the meaning of the Building and Construction Industry (Improving Productivity) Act 2016);
  2. Certain works and goods or services to be provided anywhere in Australia, provided that they would be considered as ‘related goods and services’ within the meaning of the Building and Construction Industry Security of Payment Act 1999(NSW)

Mergers and acquisitions

  • Contracts for the sale of all or part of a business.

Other

  • Contracts for the safe keeping of codes or passwords in escrow
  • Certain commercial charter arrangements involving international ships

EXCLUDED CONTRACT RIGHTS

Excluded contractual rights – section 5 of the Corporations Amendment (Stay on Enforcing Certain Rights) Declaration 2018 (Declaration) lists the contractual rights which are excluded from the ipso facto stay provisions under section 451E(1) of the Corporations Act 2001 (Cth). The following list are contractual rights which are excluded from the ipso facto regime.

  • rights to change the priority or order in which amounts are paid, distributed or received
  • Set-off rights
  • rights which change the basis on which an amount is calculated under a financing arrangement or guarantee
  • rights to indemnities for charges, expenses, losses or liabilities arising from the preservation or enforcement of rights
  • rights of assignment and novation
  • rights in relation to the treatment of circulating assets and the Personal Property Securities Act 2009(Cth) to ensure no conflict
  • certain step-in rights
  • rights of secured creditors to appoint a receiver or other controller to an asset, where another receiver or controller has already been appointed
  • enforcement rights (including acceleration rights, rights to exchange currencies or rights to crystallise a security interest) for the purpose of enforcing the right of a secured creditor to appoint a receiver or other controller to an asset, where another receiver or controller has been appointed (or where a scheme to avoid an insolvent winding up has been proposed)

Know your contracts

With the ipso facto regime now in motion (and the list of exemptions above), we strongly encourage you to carefully review your existing and future contracts carefully to ensure you understand your rights. Our takeaway tips are:

  1. Review your existing contracts to understand how these new changes affect you and your business.
  2. For any new contracts, carefully review proposed clauses to see if ipso facto applies.
  3. Make any appropriate amendments to your existing processes and documents to ensure that you are proactive with these latest changes.
  4. Ask your legal advisers to guide you and provide you with resources (for eg. a risk matrix) to inform you of the latest changes and impacts on you and your business.

 

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.