Singapore court’s cryptocurrency decision
Implications for cryptocurrency trading, smart contracts and AI
As of 1 July 2018, if a customer, sub-contractor, service provider or other contractual counterparty (which, in this article, we will call “Counter Party”) enters into a form of external administration, you may be unable to exercise certain contractual rights such as step-in rights or termination rights. Businesses should consider what this will mean for their contracts and business processes.
For contractual counterparties, consideration should be given to:
Most commercial contracts will typically include the following express termination clause: Without limiting any other right A may have under this agreement or otherwise at law, A may terminate this agreement by notice in writing to B if an Insolvency Event occurs in respect of B.
An Insolvency Event is often defined to include circumstances where a company:
• is subject to any scheme of arrangement with its creditors;
• has a receiver or a receiver and manager appointed to any part of its property; or
• enters into voluntary administration.
This type of clause is commonly known as an ipso facto clause.
An ipso facto clause entitles a party to immediately terminate or exercise another contractual right under a contract on the occurrence of an Insolvency Event. The entitlement of a counterparty to rely on an ipso facto clause to terminate a contract may deprive a company of any prospect of economic recovery.
Exercising ipso facto rights, such as contract termination, is considered to be inconsistent with one of the key statutory objectives of the voluntary administration regime, namely: for the business, property and affairs of an insolvent company to be administered in a way that “maximises the chances of the company, or as much as possible of its business, continuing in existence.”
An example of this is below:
ABC Pty Ltd (ABC) manufactures widgets. It requires 3 components to make widgets, which are supplied by XYZ Pty Ltd (XYZ). The directors of ABC appointed an administrator 2 days ago. XYZ has elected to terminate its supply contract with ABC (and therefore cease supplying the necessary components for the widgets) relying on the ipso facto clause in its supply contract with ABC. As a result ABC cannot continue to manufacture widgets and instead of being in a position to continue trading, ABC must cease to trade.
The above example demonstrates the value destruction a company can suffer as a result of the exercise of a termination right in an ipso facto clause.
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) amended the Corporations Act 2001 (Cth) to impose a prohibition on the enforcement of rights against a company including, relevantly, contractual termination rights arising on the occurrence of an Insolvency Event.
Specifically, the prohibition prevents the enforcement of contractual rights because the company is in voluntary administration, receivership or subject to a scheme of arrangement. The legislation also captures broader Insolvency Event clauses by also preventing enforcement of those contractual rights because of “the company’s financial position” at the time that they are under voluntary administration, receivership or subject to a scheme of arrangement.
The reforms emulate to some extent the ‘ipso facto’ moratorium under Chapter 11 of the United States Bankruptcy Code.
Section 365(e)(1) of the Bankruptcy Code provides that a contract may not be terminated solely because of a clause in the contract ‘conditioned on the insolvency or financial condition of the debtor’.
As a consequence, the contractual counterparties will be ‘locked-in’ and required to continue to perform contractual obligations.
‘Locking-in’ suppliers and other contractual counterparties during voluntary administration, receivership or a scheme of arrangement is intended to assist in maintaining ‘business as usual’ conditions for the company’s trading during these insolvency processes. This should help prevent the unnecessary destruction of valuable and viable businesses, and thereby create a better opportunity for a successful restructure.
As detailed above, the amendments prevent the enforcement of contractual rights because of the corporation’s financial position where the corporation is under voluntary administration, receivership, or is subject to a scheme of arrangement.
Counterparties will still be able to terminate a contract for reasons unrelated to a Counter Party’s external administration or financial position - for example, for other non-performance of an obligation such as a payment obligation. However, where the counterparty has not taken steps in relation to such a default until after initiation of the external administration, it may be difficult to show that the reason for enforcement is for anything other than the external administration or financial condition of the company.
The Court has broad powers in relation to the operation of the stay on enforcing contractual termination rights.
On the application of, by way of example, the holder of the termination right, a Court:
After the receivership ends or the company executes a deed of company arrangement, no enforcement of the ipso facto contractual right is permitted in respect of the earlier breach.
The amendments include anti-avoidance restrictions to prevent parties from contracting out of the operation of the ipso facto stay provisions in the Corporations Act.
The restrictions on the operation of ‘ipso facto’ clauses are subject to some exclusions.
The declaration made by the Minister on 20 June 2018, as well as the regulations registered by the Government on 21 June 2018, list over 30 different categories of contracts that are exempted from the prohibition on exercising rights under ipso facto clauses.
Public benefit agreements
Other notable exceptions include the following contracts or contractual rights:
Also, institutions that have security over all of a company’s assets will be able to enforce their security during the first 13 business days of a voluntary administration. A company in external administration cannot force financial institutions or other providers of funding or credit to continue to provide additional credit or funding to it.
The reforms make significant changes, which should enhance the chances of companies achieving a successful restructuring through the external administration process.
Going forward, contractual counterparties will be required to adopt a different approach in managing Counter Party insolvency and should consider the terms of their contracts, policies and procedures for dealing with those situations.
Implications for cryptocurrency trading, smart contracts and AI
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