On 1 July 20181, provisions were introduced into the Corporations Act 2001 (Cth) (Act),2 known as the 'Ipso Facto' reforms, which stop a party from exercising its contractual right to suspend or terminate a contract if the counter party is subject to certain insolvency regimes (including administration, receivership and schemes of arrangement but not liquidation). This stay extends to financiers accelerating their loans and terminating the loan agreement for reason of the relevant insolvency related trigger events unless a specific exemption applies.
In the twelve months following the introduction of these provisions, financiers, their advisors and industry groups have settled on generally accepted approaches to dealing with the stay for ipso facto events in certain finance documents. This article will take a look at three key ways in which finance documents and processes have been updated in response to this legislation. A separate article in relation to the safe harbour changes made to the Act at the same time as the Ipso Facto reforms will follow later in this series.
Riders published by Australia Pacific Loan Market Association (APLMA)
If a financier is unable to accelerate against the borrower under a loan agreement because of an ipso facto stay, the loan amounts would not be due and payable and therefore the financier would not be able to claim against a guarantor until non-repayment of the loan on a scheduled repayment date.
The APLMA has published a number of riders setting out amendments to its bilateral and syndicated facility agreements in order to deal with this issue. Broadly, APLMA recommends the following clause is included in the guarantee:
"if an Ipso Facto Event3 [has occurred/is continuing], then immediately on demand the Guarantor shall... pay all Loans, accrued interest and other amounts referred to in Clause [*] (Acceleration) as if it was the principal obligor".
As APLMA explains in the accompanying guidance note, the wording is designed to assist financiers to effectively accelerate the loan against the guarantor so that the guarantor is required to pay the full amount of the loan despite the stay on enforcement at the borrower level.
Whilst the majority of syndicated loan arrangements do not strictly require the additional wording, as syndicated loans are exempt from the ipso facto provisions, the APLMA still recommends including the relevant riders as a precaution in the event that the exemption is deemed not to apply. The wording should be included in any guarantee of bilateral loan arrangements.
New Event of Default
A relatively recent approach by some financiers has been to include a new event of default in loan agreements which is triggered by the occurrence of an "Ipso Facto Event" in relation to any obligor. Although arguably this may not give the financier the ability to accelerate against the borrower, it would cause a cross default to other obligors and finance documents that are not subject to the stay.
In the absence of any other event of default, the ipso facto default will also expressly give the financier rights to take other action (other than acceleration or termination) under the Finance Documents, including stops on further draws, taking control of project bank accounts, restricting payments of dividends or subordinated debt, and charging default interest.
Restatement v amendments
The ipso facto provisions do not apply to finance documents entered into before 1 July 2018. There is also an express carve out for contracts arising from amendments, assignments or novations of such finance documents if those contracts are entered into before 1 July 2023.
To avoid any doubt as to whether an amendment of existing arrangements will fall with the exemption, wherever possible, financiers will look to document amendments and extensions to existing facility documents as 'amendments' rather than as 'amendments and restatements'.
Where the amendments are shown by reference to an 'Amended Facility Agreement' annexed to the amendment document, to further ensure that the amendments fall within the exemption, the following statement is often included:
"The parties acknowledge and agree that a copy of the Amended Document is attached as Annexure A for ease of reference only and that it is not by its attachment intended to create a new agreement that replaces, terminates, rescinds, restates or discharges the Original Document."
Whilst the general notion 'you won't be able to accelerate your loan if the Borrower becomes insolvent' may have set alarm bells ringing among financiers (in particular those routinely engaged in the provision of bilateral facilities) at the commencement of the ipso facto changes, the last year and the above drafting mechanisms demonstrate that there are relatively simple ways to preserve a financier's rights notwithstanding the potential application of the ipso facto changes.
That said, the effectiveness of the above drafting mechanisms has yet to be tested before the courts in a high profile insolvency. We will, of course, continue to you update you as and when the jurisprudence on this issue develops.
1 by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth)
2 Sections 415D – 415G, 434J – 434M and 451E – 451H
3 APLMA defines an Ipso Facto Event as: (a) an announcement, application, compromise, arrangement, managing controller, or administration as described in section 415D(1), 434J(1) or 451E(1) of the Corporations Act 2001 (Cth); or (b) any process which under any law with a similar purpose may give rise to a stay on, or prevention of, the exercise of contractual rights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.