If your business is undergoing or has undergone restructuring, you may be protected from the enforcement of contractual rights which might be triggered as a result of the restructuring or insolvency by the operation of section 454N of the Corporations Act 2001 (Cth) (Act).

In December 2024, the effect of section 454N was considered in Okami SA Newton Pty Ltd v Newton SC Pty Ltd [2024] SASC 151, where the Supreme Court of South Australia granted the applicant relief against the exercise of contractual rights for forfeiture of its lease.

What is Section 454N?

Section 454N prevents certain contractual rights from being enforced against a company solely on the basis of its restructuring or financial position.

This protection may extend beyond the restructure period provided that the rights being enforced arose during the restructuring.

Protection does not apply to the exercise of all contractual rights, making it is necessary to review whether protection is available as circumstances arise.

Background

In February 2021, Okami SA Newton Pty Ltd (Okami) entered into a lease for a shop in the Newtown Plaza Shopping Centre for a term of 10 years (the Lease). In the following months, Newton SC Pty Ltd (Newton SC), purchased the shopping centre with plans of a major redevelopment.

In September 2024, Newton SC purportedly terminated the lease for non-payment of rent, and Okami took action to bring their lease payments up to date, while providing additional bank guarantees for future payments up to six months.

However, shortly after the termination, Newton SC became aware that Okami were undergoing a restructure. Newton SC submitted, among other things, that the Lease may be terminated under Clause 5.1.2.3.3 of the Lease contract, which provided that if the lessee enters an arrangement or composition with its creditors, the lessor shall have the right to terminate.

Okami applied to the court seeking a relief against forfeiture relying on section 454N of the Act.

Key issues

Does the “stay” period under section 454N protect Okami from enforcement of rights under Clause 5.1.2.3.3?

The Court accepted that while the “indefinite” stay provided by section 454N extends beyond the period in which the company seeking relief is restructuring, the stay does not extend to the exercise of a right that has arisen after that restructure period.

Newton argued that the right under Clause 5.1.2.3.3 arose when Okami entered into an arrangement with creditors after the restructure plan had been established.

This argument was rejected by the Court, who viewed Okami’s arrangement with creditors as “coterminous” with the restructuring ending.

The Court accepted that the purpose of the stay conferred by section 454N is to “constrain… a landlord from exercising rights following a small business restructuring which would frustrate the work to be performed by the restructuring regime which is intended to provide a basis by which a company can trade out of its difficulties”.

Was Okami “hopelessly insolvent”?

The Court was directed to the principle from Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of New South Wales Ltd (1970) 2 BPR 9562 that.

“…provided the lessor or other persons concerned can be put in the same position as before the forfeiture or re-entry, the lessee is entitled to be relieved against forfeiture upon payment of rent, costs and, in appropriate cases, of interest and of other expenses to which the lessor may have been put.”

The Court said that it may still refuse relief under section 454N of the Act if the tenant’s insolvency or perceived future insolvency would render any such relief “futile”.

The Court conducted a factual analysis to determine Okami’s solvency, finding that:

Okami demonstrated its solvency by bringing rent payments up to date and providing additional guarantees; and,
Other instances of late rental payments over the term of the Lease were dismissible as the “result of an unfortunate sequence of events”.

Would awarding relief to Okami prejudice third parties?

As none of the third parties involved in Newton SC’s redevelopment efforts appeared to have sought to pursue their rights, the Court considered that it would be “unconscionable” to not provide Okami relief as, in effect, no other parties were asserting that they would be prejudiced by the grant of the relief sought.

Key takeaways:

Section 454N of the Act can provide relief from the exercise of some contractual rights which can assist with a business restructuring or experiencing financial instability.

It is not available in all situations so advice should be sought ahead of:

restructuring on the impact of the exercise of contractual rights on proposed plans; and,
attempting to enforce contractual rights where those rights may be stayed by operation of section 454N of the Act

If you would like to discuss this article or any company restructuring that you are considering engaging in, please contact:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Ben Wyatt
Principal Lawyer
T: +61 3 9611 0115 | M: +61 409 173 928
bwyatt@sladen.com.au

Ben Ponte
Law Clerk
E: bponte@sladen.com.au