Payment Systems and Netting Act 1998

The Act directly affects:

• Participants in approved RTGS payment systems (banks, financial institutions, and their administrators).
• Parties to approved multilateral netting arrangements.
• Parties to close-out netting contracts and market netting contracts within Commonwealth constitutional reach.
• External administrators (liquidators, administrators, trustees in bankruptcy) of failed financial institutions.
• The Reserve Bank of Australia as the approval authority.
• APRA, which is involved in the regulation of ADIs and insurance companies.

Notification obligation (section 7): A participant in an approved RTGS system must notify the system administrator if the participant or another participant whose transactions it settles goes into external administration. Notification must be given as soon as practicable. Failure to notify is an offence punishable by imprisonment for 5 years (section 7(3)). A defence is available if the person took reasonable steps to comply or if the system administrator was already aware of the external administration.

Compliance with system and arrangement rules: Participants in approved systems and parties to approved arrangements must comply with the notification and other requirements of the system or arrangement rules, including notifying the system administrator/coordinator of reasonable grounds to suspect another participant is insolvent (section 12(1)(f)).

Reserve Bank approval powers: The Reserve Bank may approve RTGS systems (section 9) and netting arrangements (section 12) by legislative instrument. Approvals may be granted subject to terms and conditions. The Reserve Bank must have regard to specified criteria and may consider other relevant matters.

Reserve Bank revocation and amendment powers: Implied from the approval framework; the Reserve Bank may revoke approvals that no longer meet the statutory criteria.

Netting execution during administration: A party to an approved netting arrangement that goes into external administration "may do anything permitted or required by the arrangement in order to net" obligations incurred before or on the day of external administration (section 10(2)(a)). This is an express statutory authority overriding any insolvency law restrictions on dealing with assets.

Recovery of preferential netting (section 10(4)): If a direct payment, had it been made on the day of netting, would have been voidable in the external administration, the external administrator may recover from the other party an amount equal to the obligation. This is a limited anti-avoidance provision.

Criminal penalties: Section 7(3): Failure by a participant to notify the system administrator of external administration is an offence punishable by imprisonment for 5 years.

Civil consequences of non-approval: The main "sanction" for transactions outside the Act's protection is that they remain subject to ordinary insolvency law (the specified provisions), which may allow their unwinding or voiding by an external administrator.

Approval process (sections 8-9 for RTGS, sections 11-12 for netting arrangements): A person applies to the Reserve Bank in the approved form, accompanied by required documents. The Reserve Bank decides whether to approve. Approvals are legislative instruments and therefore subject to the Legislation Act 2003 (tabling, disallowance).

Notification on external administration: Section 7 requires notification "as soon as practicable" after the participant becomes aware of the external administration. There is no hard deadline but the obligation arises immediately upon awareness.

Netting on administration: Section 10(2) allows netting of obligations "incurred before or on the day on which the party goes into external administration" for terminal administrations, or "incurred before ... or while in non-terminal administration" for non-terminal administrations.

Corporations Act 2001 (Cth): The Act overrides a large number of Corporations Act provisions including: sections 415D-415FA (schemes of arrangement), sections 434J-434LA (deeds of company arrangement), section 437D (administrator powers), section 440B (moratorium), section 468 (disposition of property after winding up begins), section 556 (priority of claims), and section 588FL (relation-back period). These are part of the "specified provisions" definition.

Banking Act 1959 (Cth): The Act overrides Banking Act moratorium and statutory management provisions (including sections 11CAC, 11CD, 13N, 15BA, 15BB, 15BC) that might otherwise prevent participants from executing netting obligations.

Bankruptcy Act 1966 (Cth): Sections 120, 121, 122, 128B, and 128C (void and voidable transactions provisions) are overridden in the netting context.

Reserve Bank Act 1959 (Cth): Section 86 is listed as a specified provision.

Personal Property Securities Act 2009 (Cth): Sections 267 and 267A (interest in collateral on insolvency) are listed as specified provisions.

Constitutional reach limitation: The Act only applies to contracts and arrangements within Commonwealth constitutional reach. Purely State-based transactions not involving constitutional corporations may not be protected, creating a potential gap for regional or co-operative financial institutions that are not constitutional corporations.

5-year imprisonment for failure to notify: The criminal penalty for failure to notify the system administrator of external administration is severe (5 years imprisonment) and applies to the participant, not just the administrator. Insolvency practitioners dealing with participants in approved RTGS systems must move very quickly to ensure the system administrator is notified.

Recovery of preferential netting (section 10(4)): Even though netting itself is protected, if a direct payment (rather than netting) to settle the obligation would have been voidable in the external administration on the day of netting, the external administrator can still recover an equivalent amount from the counterparty. This is a targeted anti-avoidance provision that preserves some protection for creditors where transactions are structured to exploit the Act.

Non-terminal administration is narrower: For non-terminal administrations (such as voluntary administration), the Act's netting protection applies only to obligations incurred before or during the non-terminal administration. The protection does not extend to new obligations entered into after the administration period for the purpose of benefiting from the Act's protection.

RTGS system on administration day: A major bank participant in the RBA's RTGS system enters voluntary administration at 10am. Settlement transactions executed through the RTGS system earlier that morning (before 10am) are not affected by the administration: under section 6, those transactions have the same effect as if the administration had commenced on the next day.

Multilateral netting on insolvency: A derivatives dealer that is a party to an approved multilateral netting arrangement enters external administration. The arrangement allows netting of all obligations incurred before the administration date. Under section 10(2), the dealer (through its administrator) may do anything required by the arrangement to net the obligations. The net obligation owed to the dealer can be recovered by the external administrator; the net obligation owed by the dealer is provable in the administration. No obligation that has been netted can be independently pursued as a full gross obligation.

Close-out netting contract: A bank has a portfolio of derivatives with a counterparty. The counterparty goes into external administration: a trigger event under the close-out netting contract. The bank exercises its right to close out and net the terminated obligations, arriving at a single net amount payable. The insolvency administrator cannot "cherry pick" the in-the-money trades and disclaim the out-of-the-money ones.