IPSO FACTO: TMA Australia calls on Treasury to better support businesses in decline

by Paul Apathy, Vice President of the TMA’s NSW Committee and Partner at law firm Herbert Smith Freehills

On 11 May 2018, TMA Australia (TMA) made a formal submission on behalf of its members to Treasury in response to its call for submissions on the ipso facto stay regime. The regime is set to come into effect on 1 July 2018 and will only apply to contracts entered into on or after that date. Draft exceptions to the regime were released last month.

In essence, the laws are intended to restrict the ability of counterparties to terminate or modify the operation of a contract by reason of a company entering administration, receivership or a scheme of arrangement (so as to help facilitate a rescue of the insolvent company). The ability to terminate for substantive non-performance is preserved.

Of course, by seeking turnaround help early companies will hopefully be less likely to need to rely on the ipso facto regime at all, which applies in formal insolvencies and schemes of arrangement. However, there is also a place for the use of the formal restructuring and insolvency frameworks.

Central to the TMA’s submission is its desire that the ipso facto regime operates consistently, fairly and effectively to deliver restructurings and turnarounds wherever possible.

The TMA broadly advocated support for the stay where the exercise of ipso facto rights would have a substantial detrimental effect on the ability to achieve a restructuring or going concern sale that otherwise benefits creditors of the company as a whole.

However, the TMA noted that the extent and operation of the stay on ipso facto clauses needs to be carefully evaluated in light of this objective, and must have adequate regard to the position of counterparties and creditors of the company. The TMA emphasised that it is critical to the successful operation of the stay and exceptions that a degree of consistent policy and principle is maintained throughout.

The TMA noted that the regulation of ipso facto clauses is a highly complex area and that great care must be undertaken to ensure it operates as intended without adverse consequences. Accordingly, the TMA suggested some changes within the general framework of the regime that may help make it more effective in some cases.

In this regard, two of the key points that the TMA raised in its submission are:

• Strengthening of the stay order provisions

The regime currently contains stay order provisions which allow a company subject to one of the specified procedures to seek a stay order in relation a contractual right not subject to the stay provisions (for example, a termination for convenience clause).

The TMA submitted that the utility of these provisions would be greatly reduced unless they could be sought ex parte, an automatic stay applied while seeking a stay order and/or the stay orders could be sought before entering a specified procedure. The TMA also recommended excluding the stay order provisions from the grandfathering of the regime to level the playing field between pre- and post-regime contractual counterparties and allow the ipso facto regime to have some effect in the near future

• The stay regime should apply to Deeds of Company Arrangement (DOCAs)

The stay regime should cover DOCAs, which are the principal restructuring exit from a voluntary administration. They are not currently included in the framework and this presents a disadvantage for companies undergoing restructuring via this mechanism. The TMA submitted that the regime should be amended to introduce trigger events relating to entry into a DOCA and to extend the stay that applies in administration for as long as a DOCA remains on foot following that administration.

The TMA is hopeful that the regime will assist in the turnaround or going concern sale of companies subject to administration, receivership or a scheme but notes the uncertainty over its operation and the scope of the exceptions. Early intervention will remain key to effecting successful turnarounds.

The TMA’s submission is available publically online – here.

 

Thank you to the TMA members who contributed to the submission including:

• Paul Apathy (Herbert Smith Freehills)
• Rowena White (Herbert Smith Freehills)
• James Kirkpatrick (Herbert Smith Freehills)
• Dan Stathis (Herbert Smith Freehills)
• Tony Ryan (Ashurst Australia)
• Graeme Gurney (Clayton Utz)
• Jennifer Ball (Clayton Utz)
• Kathryn Smith (LLM candidate, Columbia University)
• Carl Gunther (KPMG)