Posted by Nicholas Achurch | 04 December 2018 | Construction & Infrastructure
It’s time to review and update your insolvent trading clauses and practices! Historically common law came to the aid of an asset owner needing to protect materials, plant and equipment delivered to a buyer which had not yet paid in full. Recent changes to the Corporations Act 2001 (Cth) assist such buyers in receipt of unpaid assets even though the buyers are potentially insolvent.
The changes have a broader impact, the narrow focus here is for contract drafters, especially in the construction industry.
For contracts entered from 1 July 2018 the Corporations Act changes introduce new law restricting the right to a remedy affecting owners against buyers when the buyer or other type of acquirer is affected by an insolvency event.
The changes are known colloquially as safe harbour and ipso facto reforms. That Latin reference partly references insolvency event clauses, which we’ll get to.
Very specifically, the new law comes to the aid of a company director who may otherwise be personally liable for insolvent trading provision (ie under section 588G(2) of the Corporations Act) if:
The director will be protected against insolvent trading liability if there is “a course of action” which is reasonably likely to lead to a better outcome for the company (eg its survival) than administration or liquidation.
There are exceptions. If the cumulative total of a project exceeds A$1 billion, then the restrictions on contract rights do not apply. The restrictions also do not apply to some contracts for government works.
Review of template standard insolvency event and related clauses is timely given that the restriction of rights affects a very wide range of contract provisions, such as:
To protect ownership of assets, contract drafters draft a definition of “insolvency event” when they are keen to have a fishing net to capture many circumstances of threatened insolvency. The Corporations Act changes make it timely to review the wording of those clauses.
Simply stated insolvency event clauses are usually drafted to be a very large fishing net. Events can include a company arrangement, appointment of a controller or receiver; or a company going into administration.
The Corporations Law changes were drafted so as to not interfere with the operation of the Personal Property and Securities Act 2009 (Cth) (‘PPSA’). Registration of personal property interests (over tools, materials, leasing interests and the like) perfects the interest held by the entity first registering the interest and ensures a superior legal claim.
Since the changes to the Corporations Act contracting in the construction industry has become more complex given the restrictions on traditional solutions in the event of an insolvency breach.
Almost all conventional remedies for dealing with another party’s insolvency have become unavailable for new contracts.
Therefore:
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Photo credits: Cranes photo by Jack Dylag on Upsplash. Other images, Bathurst Street construction in Sydney by Noric Dilanchian.
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