Proctor : August 2018
14 PROCTOR | August 2018 Dr Colin Anderson is an Adjunct Associate Professor at the QUT Faculty of Law, and Veena Jattan is a sessional academic at the QUT Faculty of Law. Hence, a counterparty which attempts to terminate a contract prior to the commencement of administration, when a “company is coming or possibly coming under administration”, 25 or because of “the company’s financial position”, 26 and the “company later comes under administration”, 27 will most likely be subject to the Stay. Stay Period – section 451E(2) The right28 cannot be enforced during the Stay Period. 29 The Stay Period “starts when the company comes under administration and ends at the latest of the following”: a. “when the administration ends”30 b. the date when the last of any orders extending the Stay Period ceases31 c. “if the administration ends because of a resolution or order for the company to be wound up – when the company’s affairs have been fully wound up.” 32 The meaning of the words ‘when the company’s affairs have been fully wound up’ – s451E(2)(c) The Parliament of Australia Bills Digest explains that the Stay Period will continue until the company’s affairs have been fully wound up.33 Hence, if the second meeting creditors of the administration resolve to proceed with winding up the company, the incoming liquidator will have the benefit of the Stay Period “for the purpose of providing a better return to creditors than a standalone liquidation”. 34 No extension of Stay to ‘standalone liquidation’35 The Stay does not extend to a standalone liquidation despite the clear underlying purpose of the original drafting of s436B:36 conversion from “any form of winding up to the voluntary form of procedure.” 37 When a company may be technically insolvent (under s95A), but otherwise economically viable, s436B allows a liquidator to commence administration if there is some prospect of salvaging a company, and when the expected returns may exceed those from immediate liquidation. Despite the Act providing insolvency practitioners with the ability to move from liquidation to administration, and vice versa, to take advantage of the legal tools each insolvency regime provides, the Stay does not extend to standalone liquidation. An unintended consequence of not extending the Stay to standalone liquidation will be encouragement for companies to transition into liquidation via administration so that they are afforded protection under the Stay provisions.38 Extending the Stay Period – sections 451E(3), (4) The Stay Period can be extended in two ways: 1. By application under s451E(3), or The court may extend the Stay Period “if the court is satisfied that the extension is appropriate having regard to the interests of justice.” The court may grant interim orders “while the application is being considered, but must not require”39 an undertaking as to damages as a condition from the applicant. The following matters remain unclear under s451E(3): a. Who will have standing to make the application? An administrator or a deed administrator? b. The phrase “interests of justice” has not been defined anywhere. 40 2. Automatically under express provisions of s451E(4): A right remains unenforceable against a company indefinitely after the end of the Stay Period when the reason for enforcing the right is: a. the company’s financial position before the end of the Stay Period,41 or b. the company’s commencement of administration before the end of the Stay Period, 42 or c. a reason prescribed in the regulations that relates to circumstances that existed during the Stay Period, 43 or d. is a reason referred to in sections 451E(1)(c)-(d).44 Section 451E(4) is “aimed at preventing the ‘perverse outcome’ of an IPF clause that is stayed during administration, ‘being used against a company’ once its administration has ended because it was under administration”, 45 for example, when creditors have entered into a Deed of Company Arrangement (DOCA). Although the amendments do not expressly extend the Stay to a DOCA, 46 the broad provisions under s451E(4) seem to extend the Stay to a DOCA in the applicable circumstances. Lifting the Stay – application by holder of rights s451F The Stay on a right(s) may be lifted by the court upon application “by the holder of those rights if the court is satisfied that lifting the Stay is appropriate in the interests of justice.” 47 Section 451G – Orders for rights to be enforceable only with leave of the court While a company is under administration, if a counterparty were to “exercise, threaten to exercise, or were likely to exercise” a right under a contract, because of one or more reasons referred to in ss451E(1)(a) to (d), an administrator may apply to the court to seek an order that that “right may only be enforceable with the leave of the court” and in accordance with any terms imposed.48 Section 451G makes it clear that the amendments are not restricted to IPF clauses, and that the courts will have wide discretion to order that certain contractual rights are enforceable only with leave of the court. In particular, rights which in substance are contrary to the Stay. 49 The court must specify a period for which the order is to apply, having regard to the length of the Stay50 and the interests of justice.51 The court may grant interim orders, but must not require the applicant to give an undertaking as to damages as a condition.52 Conclusion As noted above, despite consistent reference to the amendments as IPF reforms, there is no reference to IPF clauses in the amendments. Instead, the amendments refer to the unenforceability of a right under a contract. It is clear that the amendments will not be limited to IPF clauses, rather, the word ‘right’ will be interpreted and applied very broadly to contractual termination, and/ or amendment rights which are triggered by events other than, strictly, the formal voluntary administration insolvency process. Rights will be triggered by the company “coming, or possibly coming under administration”, or the company’s “financial position if the company later comes under administration.” 53 The choice by the legislators to use the word ‘right’, without any reference to IPF clauses, has two likely consequences in relation to all new contracts entered into on or after 1 July 2018: • Clauses which are atypical to IPF clauses will be caught by the amendments. • Because the amendments are not restricted to IPF clauses, the courts will have wide discretion in imposing a Stay on rights which in substance are contrary to54 the amendments. In addition, some of the drafting in the amendments, such as the phrase ‘interests of justice’ and the operation of the Stay post-administration may, unfortunately, create uncertainties that might need to be resolved by case law.