Treasury Law Amendment to take effect

Published: 06 June 2018

Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) amendment of Corporations Act 2001 (Cth) to impose a "stay" on the enforcement of ipso facto.

The above amendment to the Corporations Act has come into effect and applies to contracts entered into from 1 July 2018.

One effect of the legislation is to limit or prevent the operation of terms in a contract which allow termination of a contract for insolvency, other than liquidation or the appointment of a managing controller.

Most construction contracts, subcontracts and supply agreements include a term permitting termination for "insolvency" as defined by the contract which can include the appointment of an administrator, an inability to pay debts as they fall due, appointment of a controller and other circumstances.

The thinking behind the legislation is that such provisions often cause a company to go from a marginal position to hopelessly insolvent in short order.

The building industry was not a specific target of this legislation, it has a significant impact on many other industries.

However, as is often the case construction is disproportionately affected.

There are two likely issues for AMCA members.

Members will start to see amended provisions in upstream contracts which are likely to:

  • increase step-in rights and/or rights to take over the work;
  • increased financial disclosure obligations potentially including a right to review the financial affairs of the company;
  • reflect increased security requirements by financiers and others at the top of the contractual chain.

Existing termination provisions in their downstream contracts may no longer be enforceable. Extra vigilance will need be required if a subcontractor or supplier becomes insolvent as termination may not be effective.