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Caution for financiers – the appointment of receivers without acceleration of the debt

Authors: Zina Edwards and Monty Loughlin

Financiers should be wary of the Federal Government’s upcoming ipso facto reforms to come into effect on 1 July 2018. The laws will have a significant impact on the way in which secured property is protected and debts are recovered by a financier in an insolvency scenario for contracts entered into after 1 July 2018.

 

Limitation of acceleration rights

Acceleration rights are included in loan documents to allow a financier a right to require a borrower to repay the entirety of the principal debt (rather than just interest or arrears) when certain conditions are not met by the borrower or on the occurrence of defined events.

An ‘insolvency event’ is one such event that would ordinarily give rise to an acceleration right - usually defined to include the appointment of an administrator or receiver to the borrower. However, other than exceptions for acceleration rights for set-off and to allow a financier to net balances, the current drafting of the ipso facto reforms to come into effect on 1 July 2018 will stay a financier’s contractual right to accelerate the principal debt if that right arises because of the appointment of an administrator or a receiver over the whole or substantially the whole of the borrower’s property.

 

Implications for the appointment of a receiver

If there is an administrator or receiver appointed to a borrower, the current drafting of the ipso facto reforms will allow a financier to appoint a receiver over the top provided the receiver is appointed to the whole or substantially the whole of the borrower’s property. However, given the proposed extent of the stay, the financier will not have a right to accelerate the principal debt on an insolvency event, limiting the receiver appointed to recovering only those amounts presently due and payable.

 

Practical suggestions for financiers

Financiers should review existing security documentation to:

  • ensure that the definition of ‘secured money’ extends to ‘prospective’ or ‘contingent’ debts or liabilities. Without the incorporation of these terms, there is risk that the receiver appointed will only be empowered to recover presently due and payable debts and liabilities; and

  • ensure that the security documentation permits the receiver to deposit any prospective or contingent debts or liabilities into a suspense account until the occurrence of a future event of default (such as non-payment or non-performance), which would then allow the financier who appointed the receiver to accelerate the principal debt.

Next steps

We expect that the finalised regulations and declaration will be made available shortly. In the meantime, financiers, borrowers and their advisors should be wary of the various ways that the upcoming reforms will have an impact on transactions and other documented arrangements from 1 July 2018.

About the authors

Zina Edwards - Partner

Zina has extensive experience advising major trading and investment banks, syndicates, funds and public companies in relation to various high profile and complex financial turnarounds, restructurings and special situations. Zina has worked on a large number of distressed and performing portfolio sale transactions in Australia and across Asia acting for both purchasers and sellers. She also specialises in debt trading and alternative finance transactions and has acted for a wide range of funds and alternative capital providers.