How the Regulations and Declaration will affect attempts by counterparties to limit exposure
The ipso facto reforms will have a significant impact on the rights and leverage of counterparties to contracts with insolvent companies.
Some exclusions from the stay, such as payment and clearing systems, derivative contracts and netting arrangements, had been expected by the market, and are sensible because a stay would cause great uncertainty for, and undermine the operation of, the financial markets. Similarly, the construction and mining sectors will welcome the exclusion of step-in rights. These permit a party on the occurrence of an insolvency event in relation to its counterparty, to step in to the shoes of that party and enforce certain rights or perform obligations of that party so as to take works out of the insolvent party's hands. The reasoning behind the exclusion of these rights from the stay is that they were the parties' agreed solution designed to keep the contract on foot, despite the insolvency of one of them.
Despite these positives, it is of some concern that the lists of contracts (exempt under the Regulations) and rights (exempt under the Declaration) may lead to an asymmetrical enforcement of parties' rights, which could result in materially different outcomes for stakeholders. In addition, the grandfathering of contracts entered into prior to 1 July 2018 may result in situations where some counterparties are entitled to enforce their rights under ipso facto clauses in pre-1 July 2018 contracts against the insolvent company, while other counterparties will not be in a position to exercise such rights contained in their post-1 July 2018 contracts.
We encourage our readers to familiarise themselves with the new ipso facto regime, review all existing contracts and consider how the reforms might affect their businesses. In particular, you should ask whether any contracts to be entered into after 1 July 2018 might require re-drafting to mitigate the risks presented by the ipso facto reforms or to take advantage of the exclusions prescribed by the Regulations and the Declaration.
The exemptions specified in the Regulations and Declaration will be critical to limiting the scope and effect of the ipso facto stay regime on counterparties.
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