IPSO FACTO REFORMS IN THE CONTEXT OF BANKING AND FINANCE LAW

Introduction

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (hereinafter ‘Act’) reformed Australian insolvency law by introducing the ‘safe harbour’ provisions absolving company directors of insolvent trading in certain circumstances and by establishing a stay on enforcement of contractual rights arising automatically by reasons of insolvency of a company (so called ‘ipso facto’ clauses). The reforms have a profound impact on banking and finance law as they curtail the rights of financiers if the borrower becomes insolvent.

Reforms

Ipso facto clauses typically entitle the counterparty to terminate the contract if the other party becomes insolvent. The Act targets three insolvency procedures: entry of the company into an arrangement with its creditors, appointment of a controller over the whole or substantially the whole of its property and appointment of an administrator (hereinafter collectively ‘insolvency procedures’). Liquidation is not affected unless it proceeds from administration. An ipso facto clause may not be enforced against the company during the stay period which lasts effectively until the insolvency procedure is finalised, whether by means of the company being restructured or wound up.

The wide remit of these reforms is delimited by the exceptions contained in the Corporations Regulations 2001 (Cth) and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018.

Impact

The following rights of a financier under a finance agreement are stayed if the borrower enters an insolvency procedure:

• The right to cancel a loan facility and make the loan immediately repayable.

• The right to enforce securities such as real property mortgages or PPSR-registered security interests (subject to the exception described below).

• The right to call upon a guarantee (but not an indemnity).

The financier retains the following rights:

• The rights of set-off or combination of accounts of a customer (relevant to banks).

• The right to apply a default rate of interest.

• The right to appoint a receiver within 14 days of a company going into administration if the whole or substantially the whole of the company’s property is encumbered by a security interest (the exception is of limited practical use – the financier may not make the debt immediately repayable and thus the receiver may not realise the debtor’s property for the purposes of satisfying the whole of the outstanding debt).

The reforms significantly erode the rights of financiers to deal with insolvent borrowers but provide a crucial trade-off. If the contract obligates the financier to make further advances or provide further credit, such obligations are similarly stayed for the same stay period as any rights the financier may have under the ipso facto clause.