Debt collection commentary by Darrin Mitchell, Senior Associate at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group.
Following on from our article on the Safe Harbour provisions recently introduced, Credit Managers should be also be aware of the proposed additions to the Corporations Act 2001 (“the Act”) that attempt to create a further reforms for companies in financial stress.
The reforms are known as the “ipso facto” provisions. Don’t let the Latin term confuse you as it simply means “by the mere fact”.
An ipso facto clause is commonly the phrase used for a term in a contract that should a certain event occur, then another act can follow. Credit Managers would be aware of their own terms of credit and goods/services supply which (should) include ipso facto clauses. These clauses can include allowing for cessation of the agreement, or at least some modification, should an insolvency event occur that affects the solvency of the customer, such as liquidity issues leading to administration and/or liquidation.
A company under financial stress may wish to implement some form of restructure which allows for a trade-on of business and may include the appointment of an administrator. The ipso facto clauses within the company’s supplier agreements may result in the termination of the contract of supply, leading to the demise of the company as it can no longer obtain its core products and so defeat the intended reforms.
The recent amendments to the Act restrict the ability to use ipso facto clauses to stop supply should a customer enter into some form of administration. The stay does not affect a decision to stop credit to the company, only the supply of goods and/or services. The stay would cease if the company was placed into liquidation therefore allowing the creditor to then enforce the terms of its agreement.
Whilst these provisions allow for a company in financial difficulty to attempt to trade out of its position, creditors should be aware of their possible inability under the Act to turn off supply of their goods and/or services to the company and manage their debt collection process as they would prefer. Credit Managers should also be aware of the possibility of claims for preferential payments should the company continue to trade then go into liquidation.
The reforms are in their infancy and regulations are still being drafted which may yet determine exactly which contracts are affected. Whether or not the reforms will be successful or have any real positive effect is yet to be seen, so creditors should take constructive steps early to protect their position and interests.
The above summary is designed to give creditors a general idea of the recent reforms to and the continuing provisions of the Act that may impact upon them and debt collection processes employed by them. Any specific advice on the ipso facto reforms or preference claims received can be discussed by contacting the team at Matthews Folbigg.
Our comments on the Safe Harbour reforms can be reviewed here
If you would like more information or advice in relation to insolvency, restructuring or debt recovery practice and procedure, contact Darrin Mitchell on 02 9806 7428 or firstname.lastname@example.org or a PrincipalPrincipal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or email@example.com
Stephen Mullette on (02) 9806 7459 or firstname.lastname@example.org