Insolvency reforms and their impact on your future contracts
The playbook is familiar to many in construction, development and procurement: Performance drops off, phone calls not returned, subcontractors and suppliers start to walk, voluntary administrators are appointed. A quick call on the performance security, exercise your termination rights, step in and “it’s on with the show”. But insolvency law reform will rewrite that playbook from 1 July 2018.
The Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017 has introduced two key reforms: A “safe harbour” defence for directors who seek to develop or implement a company restructure and a statutory stay on contractual “ipso facto” terms. The reform arises from the National Innovation and Reform Agenda of December 2015 which promotes entrepreneurship and innovation in Australia. Comforting words indeed but how might the agenda play out in the old economy which still accounts for a significant part of GDP?
“Ipso facto” – from the fact itself
Commercial contracts commonly include terms that can be exercised based “ipso facto” on insolvency related events regardless of whether the event is or isn’t a breach of contract. While such contract terms might still be included, for contracts entered from 1 July 2018, those terms may no longer be enforceable.
The reform legislation now provides that a right under a contract, agreement or arrangement cannot be enforced against a body or corporation because of:
- its announcement of an Arrangement or Reconstruction
- appointment of a Managing Controller or
- its appointment of a Voluntary Administration.
Importantly, the reform legislation doesn’t exhaustively define the rights that are affected. While insolvency termination and step-in rights are seemingly obvious, what of calls on performance security, suspension of payment or perhaps even termination for convenience?
The reach of the prohibition is extensive. The financial position that underpins any such announcement of appointment may also not be relied upon in order to trigger the contract right. Further, contractual provisions that are in substance contrary the prohibitions are caught.
All the world is a stage …
Construction activity represents 5.7 % of Australia’s GDP. It also represents 16.72% of Australia’s business insolvencies. The scale of construction activity in Australia is significant in its own right. When coupled with a disproportionate experience of insolvency and heavy reliance on contracting, it strongly suggests that it will not be long before the effect of ipso facto reform will be felt in in construction, development and procurement projects. After all, a single insolvency can flow through a live project and hold up many a following activity. The potential for impact may be seen in the widespread nature of the contracts that are likely to be affected, including Australian standard AS 4902 and the New South Wales Government’s standard form GC21 Edition 2.
Rewriting your playbook
Responding to this change is not as simple as crossing a line through your contract’s insolvency clauses. In a cyclical economy, a considered response now may help you to manage your over the horizon insolvency risk. Undoubtedly, contracts that will be signed on or after 1 July 2018 are presently being bid. So, don’t wait until 1 July. Now is the time to rewrite the playbook.
15 April 2018
 The Act amends Chapter 5 of the Corporations Act 2001.
Corporations Act, Part 5.1.
Corporations Act, Part 5.2.
Corporations Act, Part 5.3A.
 HIA Window into Housing.
 March 2017 ASIC insolvency statistics.
 Refer clause 39.11.
 Refer clause 73.