The construction industry will soon have tighter regulations placed on the ability of parties to enforce the right of termination based on insolvency events.
In order to protect their interests where an insolvency event occurs, the Personal Property and Security Register (PPSR) provides protection for certain security interests that they may hold with the counterparty.
Recent amendments to the Corporations Act 2001 have decisively altered the right of termination for contracting parties in the event of an insolvency event occurring. Generally under current contracts, an insolvency event (which includes administration and receivership) often provides a trigger for termination in clauses known as ‘ipso facto’. The benefit of termination under these clauses is that it allows companies to preempt the insolvency rather than waiting for the actual event to occur.
However from 1 July 2018, these ipso facto clauses will cease to be effective in the situation that a counterparty moves into an insolvency type event. These new laws fall in line with Safe Harbour provisions (enacted under the same bill) which provide protection for directors attempting to ‘trade out’ struggling companies from insolvency. In the event that parties seek to contract out of these new provisions, regulators have been given specific powers to amend and enforce the laws to combat any such instance from occurring.
Given the effect that new laws will have on the construction and infrastructure sector, one way in which counterparties can protect their contractual interests is through the PPSR.
The PPSR grants counterparties the ability to protect any potential security interest they may have with the insolvent party by registering their interest on the PPSR. Through what is termed ‘perfecting’, parties lodge their interest with the registrar (including any associated documentation), which qualifies that interest to take priority in the event of liquidation, over any un-registered interest.
However, to ensure protection against competing registered interests, if the party’s own interest is taken for value, then this qualifies as what is called a Purchase Money Security Interest (PMSI). This interest is also registrable and what it provides is a ‘super interest’ that trumps all other interests (registered or otherwise).
An example of where the above may apply is when a head contractor has, for value, outlaid a sum to a sub-contractor for the purchase of bricks for a job site. By registering this interest with the PPSR as a PMSI, the head contractor protects his interest in the event the sub-contractor becomes insolvent by ensuring that his ownership of that specific property is protected against any other external creditor that the sub-contractor may be indebted to.
With the introduction of these new laws, it is now even more critical for contracting parties to understand the impact that insolvency may have on their contracts, and their businesses and do all that they can to protect their interests, including registering security interests on the PPSR.