What is now known as the ‘ipso facto regime’ was introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 in September 2017, which inserted a number of provisions that provided for a stay on the exercise of certain ipso facto contractual rights in the context of corporate restructuring and insolvency procedures.
What is an ipso facto clause?
Put simply, an ipso facto clause in this context is a provision that allows one party to a contract to terminate or modify the operation of the contract in the event of a specified insolvency related event. Despite the significance of the regime, and its implications in corporate restructuring and insolvency space, the provision giving rise to the stay, section 451E of the Corporations Act, has only recently been judicially considered by the Federal Court in the decision of Rathner, Citius Property Pty Ltd (Admins Apptd) [2023] FCA 26.
The Rathner Decision
Background
Citius Property Pty Ltd (Citius) is a consultancy and project management company that was put into voluntary administration in December 2022. Its principal asset was an agreement (Dexus Agreement) for the provision of project management services with Dexus Wholesale Management Limited (Dexus). The application was brought by the administrator of Citius (Administrator) and was heard unopposed in the Federal Court in January 2023.
The Dexus Agreement contained an ipso facto clause which allowed Dexus to terminate the agreement upon an insolvency event (such as the appointment of an administrator to the company) irrespective of Citius’ continued performance of its obligations under the agreement.
Although Dexus had not given any notice of termination, the Administrator sought orders clarifying the operation of the ipso facto stay in light of Citius’ dependence on the Dexus Agreement to pay its creditors, and the lack of existing judicial consideration of section 451E of the Corporations Act 2001 (Cth) (Act).
Specifically, the Administrator sought orders to the effect that ‘if the administration of Citius ends because of a resolution or order for Citius to be wound up, the stay on the enforcement of certain contractual rights described in section 451E(1) of the Act continues to operate until the winding up of Citius is complete, and that the Administrator is justified and acting reasonably in proceeding on that basis’. The Administrator also sought orders to extend the convening period for the second meeting of creditors by a full year, submitting that such an order would be in the best interest of creditors.
The Scope of the Statutory Ipso Facto Stay
The Administrator submitted that on its interpretation, the ipso facto stay regime in section 451E would appear to be available to companies in administration that transition into liquidation, and otherwise not available to companies that enter into liquidation without having been in administration immediately prior to the commencement of liquidation.
The Court considered the Administrator’s apprehensions to be unwarranted, citing the clear language and purpose of the provision. The Court opined that the ipso facto stay would operate for the length of the administration, and if the administration ends by resolution or order for winding up, the duration of the winding up. Importantly, the Court identified that the ipso facto stay does not apply to:
A contracting party’s rights to terminate that arise upon the company’s entry into liquidation. If Dexus was permitted to terminate the agreement if Citius entered into liquidation, the ipso facto stay could not restrain such an action;
A contracting party’s right to require proper performance of the contract, and the right to terminate for non-performance. As such, although Dexus could not terminate by reason of the appointment of the Administrator, if Citius failed to perform its obligations under the Dexus Agreement, the ipso facto stay could not restrain an action to terminate on that basis; and
Any other rights in the contract. The Court clarified that the scope of the statutory ipso facto stay was limited to the ipso facto provision and did not affect any other rights of Dexus under the Dexus Agreement.
In light of this reasoning, the Court did not make any order as there was no particular legal issue raised.
Extension of the Convening Period
The Administrator also sought orders to extend the convening period for the second meeting of creditors by a period of 12 months, submitting that such an order would be in the best interests of creditors. The Administrator submitted that Citius would benefit from the continued operation of the stay of the ipso facto clause in the Dexus Agreement, and that revenue earned from the operation of the Dexus Agreement during the extended period would increase the pool of funds available for distribution to creditors.
Although an application for an extension of a convening period by 12 months is by no means the longest extension period ever granted, the Court did consider the Administrator’s application for a 12 month extension to be unusual.
The Court accepted, however, that the extension sought would enable Citius to continue trading and earn the maximum possible revenue from the Dexus Agreement. The evidence submitted by the Administrator adequately demonstrated that an extension would allow for a surplus of funds available for distribution among creditors, compared with the scenario in which an extension was not granted, in which there would likely be no funds available for distribution. The Court relevantly noted that creditors had been notified of the application and had not opposed it.
In the context of the ipso facto stay, the Court noted that as a result of the extension sought, Dexus would remain party to an ongoing contractual relationship in the absence of any other basis for termination. Given that the extension was not opposed by Dexus, and that its rights to terminate for performance were not restrained by the ipso facto stay, the Court accepted the Administrator’s submissions and made the orders sought.
Key Takeaways
Although the Rathner decision did not include any orders specifically in relation to the ipso facto stay, it confirmed that the ipso facto stay operates as expected by insolvency practitioners, in that it:
does not restrain any rights that arise by reason of a company entering into liquidation and does not restrain any other rights of termination such as termination for non-performance;
operates for the duration of the administration; and
is a relevant factor in the consideration of applications to extend a convening period, as the Court will consider the impact of an extension on contracting parties.
For this reason alone, it is a helpful decision in providing some comfort around the operation of the ipso facto stay.