The ipso facto stay in voluntary administration: first decision gives some (limited) guidance

Orla McCoy, Mikhail Glavac
07 Feb 2023
Time to read: 4 minutes

The first reported decision on the ipso facto stay provisions of the Corporations Act provides clarity that they operate as intended in voluntary administration – leaving the trickier issues for another day.

The operation of the ipso facto stay, particularly in voluntary administration, is continuing to exercise the minds of commercial counterparties, particularly on infrastructure and construction projects, and any judicial guidance has been eagerly awaited. The first reported decision has now arrived, and although the Federal Court was not called upon to resolve any particularly complex questions, it did at least provide reassurance that the ipso facto stay will apply to pre-appointment contracts largely in the manner that the market expected (Rathner, in the matter of Citius Property Pty Ltd (Administrator Appointed) [2023] FCA 26).

Citius Property goes into administration and the ipso facto stay arises

Citius Property Pty Ltd is a property management and consultancy company, whose principal asset is a property management agreement with commercial landlord Dexus. On 29 December 2022, an Administrator was appointed to Citius.

The Dexus Agreement includes an “ipso facto” clause which permits Dexus to terminate the agreement upon Citius entering administration (among other “insolvency events”), regardless of Citius’ performance of its obligations under the agreement. Under section 451E of the Corporations Act 2001 (Cth), the enforcement of such clauses is restrained during the period of administration and, if the company is subsequently wound up, until the completion of the winding up. It does so by preventing a counterparty from exercising rights solely by reason of the fact of a company’s entry into administration or its financial position (if in administration). The counterparty’s other rights – such as termination for non-performance – are unaffected by the stay.

Noting that section 451E had not previously been the subject of judicial consideration, the Administrator sought orders from the Court to “provide certainty” as to how the provision operates in the external administration of Citius. Specifically, he sought orders “to the effect that, if the administration of Citius ends because of a resolution or order for Citius to be wound up, the stay on the enforcement of certain contractual rights described in section 451E(1) of the Act continues to operate until the winding up of Citius is complete, and that the Administrator is justified and acting reasonably in proceeding on that basis.”

The Administrator contended it might be seen as “anomalous” that section 451E was available to companies in administrations that transition into liquidation, but not to companies which had not been in administration immediately prior to the commencement of the liquidation. Dexus was provided with notice of, but did not seek to be heard on, the application.

The scope of the ipso facto stay

Justice O’Bryan found that there was no anomaly in the operation of section 451E in administration and liquidation and that the Administrator’s concerns were unwarranted, explaining that:

“The stay under section 451E does not apply to contractual rights that may arise by reason of the winding up. If the counterparty has a right to terminate a contract by reason of the company’s entry into liquidation, section 451E does not operate to stay that right. The stay only applies to a right that arises by reason of the company entering administration or the company’s financial position during administration. It is the stay of such a right that continues during a subsequent liquidation. The section does not stay the exercise of a right that arises by reason of liquidation.”

Given those findings, Justice O’Bryan declined to make any orders in respect of the operation of the Act, on the basis that there was no legal issue or question requiring determination with respect to the proper operation of section 451E and the proposed orders went no further than restating the effect of the section.

In a development which may have import for commercial counterparties, the Administrator was, however, successful in obtaining orders extending the convening period for a full year until 3 February 2024 (which is, by any measure, a lengthy extension), to facilitate Citius in continuing to trade and thereby generating the balance of the fee revenue available under the Dexus Agreement. In granting the extension of the convening period, Justice O’Bryan noted the effect on Dexus of the concomitantly extended operation of the stay in section 451E of the Corporations Act. His Honour did not, however, find that this precluded the grant of the extension, noting that Dexus:

  • did not oppose the application;
  • would retain rights to terminate the Dexus Agreement, if it was not properly performed by Citius; and
  • could relist the matter before the Court to address any prejudice that arose from the extension.

Applying the ipso facto stay provisions in voluntary administrations

While the issues decided by Justice O’Bryan were narrow (and did not involve any challenge to the ipso facto stay by the relevant counterparty), it is nevertheless helpful to have had some judicial consideration of the ipso facto provisions, however limited.

First, Justice O’Bryan’s analysis of section 451E in the context of applications for extensions of the convening period will be helpful in making such applications in the future. His Honour highlighted that it is only the ipso facto provisions of a contract which are stayed pursuant to section 451E of the Corporations Act, limiting the prejudice suffered by contractual counterparties subject to the stay if the convening period is extended. The judgment also emphasises that counterparties subject to the section 451E stay are, like landlords and lessors, key stakeholders that should be notified of and served with any extension application. We note, however, that the extension ordered by Justice O’Bryan was unusually lengthy and it cannot be assumed that courts will be willing to grant similar extensions in other cases, particularly where there are a larger number of stakeholders that would be affected by the extension (such as employees and landlords, neither of which were a factor in this case). In appropriate circumstances, it may be cheaper and more efficient to simply negotiate a standstill or forbearance with a contractual counterparty, rather than prolonging the administration period and incurring the costs of a court application. Commercial counterparties served with what might appear to be a “routine” extension application by an administrator should closely scrutinise such application, consider whether their rights will be impinged by a proposed stay and, if appropriate, seek legal advice on intervening on such application.

Secondly, Justice O’Bryan’s judgment puts beyond doubt that section 451E only captures contractual rights triggered or pertaining to administration and that, while the stay may continue into a subsequent liquidation, the company’s counterparties will not be restrained from exercising rights that are triggered by the winding up (as distinct from the administration). Given that “insolvency events” are almost universally drafted to capture both administration and liquidation, in practice this means that the stay loses most of its force once a company is wound up. Given the clear terms of section 451E this is not, however, a surprising outcome.

Key takeaway

Unfortunately, there continues to be no judicial consideration of key issues that are likely to be more contentious, including what is required for a Court to order that the ipso facto stay be lifted and the interpretation of the legislative instruments setting out the kinds of contracts that are not subject to the stay. Further clarity on such issues would be of significant assistance both to contractual counterparties and insolvency practitioners in navigating the ipso facto laws.

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