Project finance and the ‘ipso facto’ reforms

  • From 1 July 2018, new laws limit financiers’ rights to accelerate loans and enforce security when a company is in administration or under receivership.
  • There are many exceptions. Mostly, project financiers will fall within the exceptions and be able to accelerate and enforce, but there are some gaps.
  • The laws will also help project financiers by limiting suppliers’ and offtakers’ rights to terminate their contracts in insolvency.

What are the ‘ipso facto’ laws?

From 1 July 2018, amendments to the Corporations Act restrict exercise of contractual rights against a company if any one of the following three insolvency triggers occurs: (1) the company goes into voluntary administration, (2) a receiver or similar officer is appointed over all or substantially all the company’s assets, or (3) (less commonly) there is a creditors’ scheme of arrangement for avoiding insolvency.

In these three scenarios, there is a stay on enforcing contractual rights that arise from (1) the occurrence of the trigger, or (2) the company’s financial position if the trigger has occurred. The ‘stay’ means that the rights cannot be enforced without the consent of the court, or of the insolvency practitioner running the company.

The aim of the reforms is to help companies in voluntary administration or similar regimes work through their solvency issues without suppliers being able to withdraw their services if the company has not actually defaulted.

How do the new laws apply to financiers?

Financing agreements typically contain a long list of events of default. These include default under the agreement itself (such as failing to pay interest or principal), and other signs of financial distress such as default under other agreements (‘cross default’), liquidation, or insolvency administration.

When an event of default occurs, the financier can accelerate the loan (declare the full amount immediately due and payable), and enforce security. But unless an exception applies, the new laws will prevent exercise of these rights in reliance on:

  • events of default that consist of the insolvency trigger itself – for example, an event of default which says ‘a voluntary administrator is appointed’, or
  • if the insolvency trigger has occurred, events of default that are determined by the company’s financial position – this may prevent reliance on events of default such as breach of financial ratios, cross default, or material adverse change.

The financier will still be able to act under other events of default, if they occur, such as a failure to pay principal or interest under the financing agreement, or the company going into liquidation.

What exceptions apply to project financiers?

There are over 50 exceptions to the new restrictions. Several will apply in typical project finance transactions, so that financiers will retain the same enforcement rights as previously.

Relevant exceptions include the following.

  • (PPPs) Contracts involving special purpose vehicles providing for public-private partnerships. (Though neither ‘special purpose vehicle’ nor ‘public-private partnership’ is defined.)
  • (Project finance) Contracts with special purpose vehicles providing for project finance, under which finance is to be repaid from the project’s cash flows, and there is security over all or substantially all assets.
  • (Syndicated loans) Contracts for syndicated loans.
  • (Derivatives) Contracts that are, or are connected with, derivatives.

Under these and other exceptions, life should continue much as before for project financiers. But there may be issues and questions in particular circumstances. For example:

  • SPVs. What is a ‘special purpose vehicle’? Could a company that begins life as an SPV develop into a more ‘normal’ corporate that is outside the scope of the project finance exception?
  • Bilaterals. Project finance is often provided by syndicates and so will fall within the syndicated loan exception. But sometimes the package contains components, such as a bilateral facility provided by an asset financier, secured only over the particular asset, which will fall outside both the project finance and syndicated loan exceptions.
  • Intercreditor terms. Complex finance packages from multiple financiers are often provided on common terms, where it is assumed that if one can accelerate a loan or close out a hedge, then they all can. These arrangements may not work as intended if some financiers are entitled to enforce but others, such as the bilateral asset financier, are not.

Financiers are unlikely to change their documentation much to deal with the new laws. They will still want the full list of events of default, even if some of them may be unenforceable in some circumstances. But they may want to address some of the intercreditor complexities.

Some good news for project financiers

The new laws do not apply just to financiers. They will also apply to other contractors dealing with the company, such as suppliers or offtakers. And (subject to the exceptions) they will sometimes mean that a supplier or offtaker is not entitled to terminate its contract with an insolvent project company, as long as the project company keeps performing its obligations under the contract.

Since the health of the project company often depends on keeping these contracts alive, this can be a good outcome for its financiers.

Details of the new laws

The amendments to the Corporations Act were implemented by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017, and the exceptions by the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 and Corporations (Stay on Enforcing Certain Rights) Declaration 2018. The above summary touches only briefly on some aspects of the laws: there are many more exceptions and other complexities.

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