Contracts, agreements, arrangements and rights to which the stay on enforcing ipso facto clauses does not apply; final Regulations and Declaration published
The reform and its progress
From 1 July 2018, the stay on reliance by solvent counterparties on “ipso facto” clauses in voluntary administration, certain receiverships and creditors' schemes of arrangement will come into effect. A number of the exceptions to that stay - a critical feature of this reform, particularly for financiers and insolvency practitioners - have now been legislated, after a consultation period conducted by Treasury earlier this year. An overview of those exceptions is set out below.
You can read further detail on this reform (and the insolvent trading 'safe harbour' defence) in our earlier client note published in September 2017, available here. Background to the consultation process on the proposed exceptions to the stay is set out in our April 2018 alert, available here.
While there is now certainty as to the arrangements and rights that will not be subject to the stay on ipso facto provisions, the market will need time to digest them and come to an understanding of the practical impact of the exceptions to the stay, and the stay itself, on particular transactions and documentation.
In the meantime, if you have any queries in relation to the new ipso facto reform and the impact it may have on your business or contractual arrangements, please get in touch with your usual Baker McKenzie contact, or one of the contacts below.
Contracts, agreements, arrangements and rights excepted from the ipso facto stay
Set out at the end of this alert is a summary of the excepted arrangements set out in the regulations and the excepted rights set out in the declaration. Updated explanatory statements were released with the final regulations and declaration - and they provide detailed commentary setting out the reasons for the inclusion of the various exceptions, and accordingly are a good source for assistance when interpreting the regulations and declaration.
Additional thoughts on new or amended exceptions in the regulations - arrangements
Special Purpose Vehicles
As flagged in an earlier alert, the exception with respect to special purpose vehicles has been revised to narrow its operation. There are now two exceptions included in the regulations which refer to arrangements involving a special purpose vehicle where such arrangements provide for securitisation, private-public partnerships and certain project financing arrangements. In order to benefit from the exception, the relevant project financing arrangement must be one where financial accommodation is to be repaid primarily from the project's cash flow and all or substantially all of the project's assets are held as security for the financial accommodation.
Bonds, promissory notes and syndicated loans
New exceptions provided for in the final regulations are contracts, agreement or arrangements:
- for the underwriting of an issue, or sale, of;
- under which a party subscribes for; and
- that are, or govern,
bonds, promissory notes or syndicated loans. This is in addition to equivalent exceptions with respect to securities and financial products which were included in the exposure draft regulations.
Importantly, we note that bilateral loans and bank guarantee arrangements appear not to be captured by the exceptions such that the ipso facto stay will apply to such arrangements.
Amendments to pre-1 July 2018 arrangements
While the exposure draft of the regulations provided that novations, assignments and variations to a pre-1 July 2018 arrangement made after 1 July 2018 were excepted from the new regime, the final regulations have also included an end date for this exception. Only novations, assignments and variations made before 1 July 2023 will benefit from this grandfathering arrangement.
The final regulations have included an additional exception for arrangements for providing building work, construction work or related goods and services where total payments under all such related contracts is at least $1 billion. However, this exception will only extend to such arrangements entered into before 1 July 2023.
Other new exceptions
Other exceptions included in the final regulations, which were not included in the exposure draft include arrangements:
- relating to Australia's national security, border protection or defence capabilities;
- for the supply of goods or services to, or by or on behalf of, a public hospital or a public health service; and
- for the supply of essential or critical IT or communications technology, products or services to the Commonwealth, its authorities or local governing bodies.
Additional thoughts on new or amended exceptions in the declaration - rights
Right to take action to enforce certain rights
One change to the declaration from the exposure draft has been the clarification of the ability to exercise enforcement rights in one of the insolvency circumstances to which the ipso facto stay applies. Upon review of the exposure draft declaration, there had been concerns that, while the ability to appoint a controller was preserved, the ability to accelerate debt in those circumstances was stayed (which would potentially have had the effect of limiting the controller to recovering only those amounts presently due and payable).
The declaration now specifies that the stay does not apply to the right to take action to enforce the right to appoint a controller over the assets of a company the subject of an insolvency event for the purposes of enforcing the right to appoint the controller, whether or not an amount is due for payment, will or may become due for payment, or is unpaid.
The explanatory memorandum to the declaration (and a note in the declaration itself) specifies that a right to take action to enforce includes acceleration (i.e. the ability to bring forward a future obligation to pay money), the right to convert currencies or the right to crystallise a security interest.
Separately, it is also now clear that a person's right to appoint a controller in all of the insolvency events the subject of the ipso facto regime is preserved (previously a person's right to appoint a controller when the relevant company was subject to a scheme of arrangement was not preserved, unless someone else had appointed a controller to that company).
The declaration has clarified that the exclusion of the exercise of step-in rights from the ipso facto stay is not limited to performing obligations or enforcing rights in the contract that is 'stepped into' - this exclusion also applies to obligations and rights contained in other contracts or arrangements that are contemplated by, and are within the ambit of, the primary step-in right. The right to engage other parties to perform the obligations or enforce the rights is also expressly excluded from the stay.
Summary of excluded arrangements specified in the regulations
In summary, the arrangements set out in the regulations to be excluded from the ipso facto stay include:
- arrangements relating to the Convention on International Interests in Mobile Equipment (the 'Capetown Convention');
- government licences or permits;
- arrangements relating to Australia's national security, border protection or defence capabilities;
- arrangements for the supply of goods or services to, or by or on behalf of, a public hospital or a public health service;
- arrangements for the supply of essential or critical IT or communications technology, products or services to the Commonwealth, its authorities or local governing bodies;
- arrangements relating to securities and financial arrangements, including:
- securities financing transactions;
- arrangements for underwriting securities, financial products, bonds, promissory notes or syndicated loans;
- subscription agreements in respect of securities, financial products, bonds, promissory notes or syndicated loans;
- arrangements that are, or govern, securities, financial products, bonds, promissory notes or syndicated loans;
- arrangements under which securities are, or may be, offered under a rights issue;
- arrangements for issuances of securities, financial products, bonds, promissory notes or syndicated loans belonging to a pre-1 July 2018 class of fungible securities or financial products (i.e. 'tapping' an existing issuance);
- margin lending facilities;
- arrangements that are a covered bond, or are for the issuing of covered bonds;
- arrangements providing for the management of financial investments;
- arrangements for the sale of all, or substantially all, of a business (including a sale by way of share purchase);
- complex arrangements between sophisticated parties, including:
- arrangements to which a special purpose vehicle is a party and that provide for securitisation, a public-private partnership, or certain project financing arrangements;
- arrangements for keeping source code in escrow; and
- arrangements for certain commercial charters of non-Australian ships;
- arrangements relating to debt and ranking of creditors, including subordination arrangements, flawed asset arrangements and factoring arrangements;
- arrangements relating to the operating rules of financial markets and certain arrangements relating to clearing and settlement facilities;
- certain netting and close-out arrangements, including in relation to approved RTGS systems;
- arrangements entered into or renewed on or after 1 July 2018 but before 1 July 2023 if they arise as a result of exercising novation, assignment or variation rights under an arrangement entered into before 1 July 2018; and
- arrangements for providing building work, construction work or related goods and services where total payments under all such related contracts is at least $1 billion (but only in respect of such arrangements entered into before 1 July 2023).
Summary of excluded rights specified in the declaration
In summary, the types of rights excluded from the ipso facto stay include:
- rights under a financing arrangement, or guarantee, indemnity or security related to a financing arrangement, entitling a counterparty to change the basis of calculation of an amount (e.g. default interest);
- rights to indemnities for costs, liabilities and loss incurred when preserving or enforcing rights;
- termination rights in a standstill or forbearance arrangement;
- rights to change the priority, or order, in which amounts are to be paid, distributed or received;
- rights of set-off, rights of combination of accounts and rights to net balances;
- right to take action to enforce certain rights whether or not an amount is due for payment, will become due for payment or is unpaid;
- rights to assign or novate rights or obligations;
- rights regarding circulating assets;
- rights regarding the transfer of accounts or chattel paper;
- certain rights that restrict a grantor of a security interest in property from dealing with the property;
- certain step-in rights; and
- rights to enforce a possessory security interest.