Thinking | 11 December 2018

Corporate trustees and ipso facto reforms

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Act) introduced new laws which operate to stay the enforcement of ipso facto clauses that are triggered upon a company suffering an insolvency event. These new laws come into effect for contracts entered into on or after 1 July 2018.

An ipso facto clause creates a contractual right that allows a party to terminate or modify the operation of a contract upon the occurrence of a specific event. The operation of ipso facto provisions can reduce the scope for a successful restructure and destroy enterprise value of a company entering external administration.

The Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 prescribes kinds of contracts, agreements or arrangements under which rights are not subject to the stay of ‘ipso facto’ provisions.

In 2017, the Commonwealth government released an Explanatory Document which set out types of contracts and contractual rights which it was proposed be excluded from the stay of ipso facto clauses.1 This Explanatory Document expressly included the ‘replacement of trustees’ as an excluded right under the Act.

Trust deeds usually contain a provision for the automatic removal of (or right to replace) a trustee upon an insolvency event such as the commencement of winding up.

Relevantly, however, following consultation with industry groups the Regulations ultimately omitted the ‘replacement of trustees’ as a listed exclusion. Accordingly, the new laws prevent the removal or replacement of a trustee of a corporate trustee only by reason of an insolvency event.2

Issues identified with the ‘replacement of trustees’ as an excluded contract

The operation of ejection or disqualification clauses often cast doubt upon the ability of a liquidator appointed to a company which has been removed as trustee to deal with trust property. Liquidators commonly make application to court for their appointment as receiver of the trust property to overcome any legal impediment. Naturally, this step added to the cost of the liquidation and as a corollary diminished the pool of assets available for distribution to creditors.

The 1988, the Harmer Report recommended limits on clauses in trust instruments which automatically remove, or provide power to remove, a company as trustee upon an external administration. The Report noted that:

‘the operation of such a provision may lead to conflict between the liquidator and the new trustee and impair the efficient winding up of the affairs of the company, resulting in additional expense and delay.’3

Industry groups such as the Australian Restructuring Insolvency & Turnaround Association endorsed and renewed the observation of the Harmer Report that:

‘the administration of a corporate trustee will be more efficient if the … [external administrator] is able to take complete control of trust assets and if there are limits on the power to remove the company as trustee.’4

Accordingly, the omission of these ejection and disqualification clauses as excluded rights under the Act may potentially alleviate some of the unnecessary complication and costs in the external administrations of corporate trustees.

1Explanatory Document, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, 1.
2The prohibition will not apply if the administrator consents or if there is a court order.
3Australian Law Reform Commission, General Insolvency Inquiry (Harmer Report) Report 45 (1988), 254.
4Harmer Report, 257.


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