INSOLVENCY ALERT: Major insolvency law reforms to impact contracts

29 November 2017

Publications

What has changed and why?

Major reforms to Australia’s insolvency laws were recently passed making ipso facto clauses unenforceable in certain insolvency procedures.

The reforms have been made so that contractors will still be able to receive benefits under the contract whilst in an insolvency administration, providing them with an opportunity to turn their business around.

Ipso facto clauses are terms in a contract, which deem an event to have occurred by reason of some other event having occurred.  The most common form of these clauses are contained in the default provisions in contracts, which deem a default to have occurred should, for instance, a party have entered some form of insolvency proceeding (e.g. receivership or voluntary administration).

Recent amendments to the Corporations Act, which commence on 1 July 2018, impose a stay upon a party’s right to rely upon the fact when a corporation has:

  • had a received appointed;
  • had a managing controller appointed;
  • entered voluntary administration;
  • announced it intends to propose a scheme of arrangement due to possible insolvency.

The stay prevents a party from relying upon any of the above facts, or the corporation’s financial position should any of the above events have occurred.  The stay that operates, is during the period of the receivership, voluntary administration or period under which the company is subject to a managing controller. In the case of a scheme of arrangement, the stay operates for an initial period of three months following the announcement of a proposal and can be extended by Court order.

The Supreme Court of each State and the Federal Court of Australia have the power to waive the operation of these provisions. In addition, statutory exceptions in relation to types of contracts and companies to which they apply may be contained in the Regulations (which are still to be proclaimed).

Recommendations

We recommend that clients review all their current standard form contracts and, in particular, contractual clauses that deal with termination, insolvency, breach, retention and security to ensure that their interests are protected to the extent permissible under the new legislation.  For example, it may be possible to expand on performance requirements or events of default which could be relied upon by you should one of the above insolvency events occur in relation to another party to your contract, in order to lower risk. Any new clauses must be carefully drafted so as to not breach the amending legislation or other laws applicable.

In addition, all your procedures should be reviewed for the purposes of ensuring that you do not breach the above provisions post 1 July 2018.

Summary

These changes are a significant policy shift from the previous regime, and require a rethink of all contract drafting in respect of those contracts that extend beyond 1 July 2018. A carefully drafted contract that addresses the potential risks to the company is the best way to protect your company’s interests against undue economic pressure that can occur if a counterparty enters an insolvency administration (other than liquidation) or other event that will prevent the use of ipso facto clauses, particularly the right to terminate.

For further information about how the reforms may affect you, please contact us on the details below.

Neil Hannan |  Partner | +61 3 8080 3589 | nhannan@tglaw.com.au