Should I Stay Or Should I Go - First Decision Dealing With The Section 451E Stay On The Enforcement Of Ipso Facto Clauses

In the recent case of Rathner, In the matter of Citius Property Pty Ltd (Administrator Appointed), ¹ the Federal Court of Australia considered an application brought by the administrator of Citius Property Pty Ltd (Citius) for orders in relation to the administration of the company.

The first part of the application was for orthodox orders extending the convening period for the second meeting of creditors pursuant to section 439A(6) of the Corporations Act 2001 (Cth) (Act).  However, the second part of the application was for orders to confirm that the stay of an ipso facto clause pursuant to section 451E of the Act operates for the length of the administration, and if the administration concludes because the company is wound up, until the winding up is complete.

In his decision, O’Bryan J provided a useful refresher of the principles relating to extending a convening period, but more importantly provided the first judicial consideration of the operation of the statutory stay regime for ipso facto clauses.

Background

Citius was incorporated on 1 December 2002, and provided consultancy and project management services in connection with the development of industrial properties. 

On 28 December 2022, following the delivery of an adverse judgment and the making of adverse costs orders against Citius in a court proceeding, Mr Tobin (who was at all times the sole shareholder, director and secretary of Citius) placed Citius into voluntary administration.

Citius’ only material asset was an agreement dated 19 December 2018 with DWPL Nominees Pty Ltd and Dexus Wholesale Management Limited (together the Dexus Parties) for the provision of project management services by Citius in connection with a commercial property development project (Dexus Agreement). 

The Dexus Agreement provided for a term ending in December 2023 (unless the project was completed or sold earlier than that), with Citius’ fee to be paid in fixed monthly instalments along with a performance fee pro-rated across certain project milestones.  The Dexus Agreement also contained an ipso facto clause that entitled the Dexus Parties to terminate the Dexus Agreement if (amongst other things) an Insolvency Event occurred in respect of Citius, including “[Citius taking] any step to obtain protection or is granted protection from its creditors under any applicable legislation or an administrator is appointed” (the Ipso Facto Clause).

As there were no funds available for distribution to creditors in the administration of Citius, the administrator sought orders pursuant to sections 447A(1) and 439A(6) of the Act to extend the convening period for 12 months to allow Citius to continue performing its obligation under the Dexus Agreement to generate funds for distribution to creditors. 

The administrator also sought orders and directions pursuant to section 451E(3)(a) of the Act and section 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Act) (IPS) with respect to the scope and operation of the stay on the enforcement of the Ipso Facto Clause pursuant to section 451E of the Act.

The administrator’s application was supported by the Committee of Inspection and was not opposed by any party, including the secured creditor of Citius or the Dexus Parties.

Disposition of the application for orders to extend the convening period

Section 439A(6) of the Act gives the Court power to extend the convening period of the second meeting of creditors.  Justice O’Bryan outlined a number of matters relevant to the extension of a convening period pursuant to section 439A(6) of the Act:

• the Court must reach an appropriate balance between an expectation that the administration will be relatively speedy and the countervailing factor that undue speed should not be allowed to prejudice sensible and constructive actions directed to maximising a return to creditors;
• the categories of cases in which an extension is granted include where:
  • the size and scope of the business in administration is substantial;
  • the extension will allow a sale of the business as a going concern; and
  • additional time is likely to enhance the return for unsecured creditors;
• the Court will be more inclined to grant an extension where there is no evidence of material prejudice to those affected by the extension and the administrator’s estimate of the time required to complete the administration has a reasonable basis;
• the Court will consider and give weight to the opinion of the administrator and the views of a committee of inspection as to the need for an extension;
• it is necessary to consider the impact of the extension sought on creditors and interested parties, including employees and contractual counterparties of the company; and
• lengthy extensions to the convening period are not desirable but have been granted in previous cases to enable the administrators to prepare a meaningful report to creditors having regard to the size and complexity of the businesses in question and for the completion of a sale process.

Justice O’Bryan noted that the length and purpose of the extension sought by the administrator in this case were unusual, but ultimately granted the extension.  His Honour accepted the administrator’s submissions and held that:

• the extension would result in the continued operation of the statutory stay of the Ipso Facto Clause under section 451E(1) of the Act thereby allowing Citius to continue performing its obligation under the Dexus Agreement.  This in turn was likely to result in funds becoming available for distribution to the creditors;
• the extension supported the possibility/potential for Mr Tobin to develop and advance a proposal for a deed of company arrangement which may produce a better return for creditors than a winding up;
• no creditor had expressed opposition to the extension and the orders made provision for any affected creditor with a sufficient interest to apply to vary the orders in the event that any prejudice arises in the future;
• the employees were unlikely to be worse off by reason of the extension and in fact, one of the employees was a member of the committee of inspection which voted unanimously in favour of the extension;
• the Dexus Parties did not oppose the extension and in any event, the operation of section 451E only applied to the Ipso Facto Clause such that the Dexus Parties would retain their rights to require proper performance from Citius and to terminate the Dexus Agreement if it is not property performed; and
• the orders sought also enabled the administrator to convene the second meeting of creditors at an earlier time if it became appropriate to do so, thereby promoting the efficient conduct of the administration.

Justice O’Bryan held that the extension, although lengthy, was consistent with the object of Part 5.3A of the Act, namely to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company or its business continuing in existence or, if that is not possible, that results in a better return for the company’s creditors and members than would result from an immediate winding up. 

Disposition of application for orders re the statutory stay of the Ipso Facto Clause

Section 451E(1) of the Act relevantly provides that a contractual right that is in substance triggered by a corporate party being placed into administration cannot be enforced against that corporate party for the period set out in section 451E(2).

Section 451E(2) provides that the right in question cannot be enforced during the period starting from when the company goes into administration and ending on the latest of the following:

• when the administration ends;
• if one more orders are made to extend the stay period as a result of an application made before the administration ends – when the last made of those orders ceases to be in force; or
• if the administration ends because of a resolution or order for the company to be wound up – when the company’s affairs have been fully wound up (emphasis added).

It is worth noting that the administrator’s application was to ensure that the statutory stay of the Ipso Facto Clause in the Dexus Agreement would continue to operate even if the administration ended and Citius was placed into liquidation.  The administrator’s concern was that there appeared to be a potential anomaly in the operation of section 451E in that the stay was available to a company in liquidation that had previously been in administration but was not available to a company that went straight into liquidation, and the administrator wanted to obtain directions to confirm that there could be no question that section 451E should be given effect on its terms – ie that the Ipso Facto Clause would be stayed if Citius’ administration ended and Citius was placed into liquidation.

Justice O’Bryan considered this argument but ultimately declined to make the orders sought by the administrator. 

His Honour held that the language and purpose of section 451E(1) of the Act is clear on its terms such that the stay of an ipso facto clause under section 451E:

• only applies to a right that arises by reason of the company entering administration, although that stay will continue during a subsequent liquidation; and  
• does not apply to a right that arises by reason of the company entering into liquidation.

His Honour went on to find that it was clear in the present case that section 451E operated to restrain the Dexus Parties from terminating the Dexus Agreement by reason of Citius going into administration, and that if the administration ended by reason of an order or resolution that Citius be wound up, then the restraint would continue for the duration of the winding up.

Lavan comments

This case is the first time that the regime in section 451E has been considered by a Court, and it raises a number of interesting questions including as to what would be the proper outcome if a contract contained distinct and separate rights to terminate the contract, only one of which was triggered by the company going into administration and the other being triggered by the company going into liquidation.  Based on this decision, it appears that a separate right triggered by liquidation would not be caught by the statutory regime.

The case also provides a useful refresher on the principles relevant to an application to extend the convening period for a company in administration.

If you have any questions about the operation of section 451E of the Act or how extensions of the convening period for companies in administration work, the experienced Lavan team is here to help.