14Effectiveness of close‑out netting contracts

#### 14 Effectiveness of close‑out netting contracts (1) If: (a) Australian law governs a close‑out netting contract; and (b) the contract is entered into in circumstances that are within Commonwealth constitutional reach; the following provisions apply: (c) obligations may be terminated, termination values may be calculated and a net amount become payable in accordance with the contract; (ca) security given over financial property, in respect of obligations of a party to the contract, may be enforced in accordance with the terms of the security, provided the terms of the security are evidenced in writing (but see section 14A); (d) paragraphs (c) and (ca) apply despite: (i) any disposal of rights that may be netted under the contract; or (ii) the creation of any encumbrance, or any other interest, in relation to those rights or financial property mentioned in paragraph (ca); or (iii) the operation of any encumbrance, or any other interest, in relation to those rights or that financial property that is created after the commencement of this section; in contravention of a prohibition in the contract, or in the security mentioned in paragraph (ca); (e) for the purposes of any law, the assets of a party to the contract are taken: (i) to include any net obligation owed to the party under the contract; and (ii) not to include obligations terminated under the contract. (2) If: (a) a person who is, or has been, a party to a close‑out netting contract goes into external administration; and (b) Australian law governs either: (i) the external administration; or (ii) the contract; the following provisions apply: (c) obligations may be terminated, termination values may be calculated and a net amount become payable in accordance with the contract; (d) obligations that are, or have been, terminated under the contract are to be disregarded in the external administration (but see subsection (5)); (e) any net obligation owed by the party under the contract that has not been discharged is provable in the external administration; (f) any net obligation owed to the party under the contract that has not been discharged may be recovered by the external administrator for the benefit of creditors; (fa) security given over financial property, in respect of obligations of a party to the contract, may be enforced in accordance with the terms of the security, provided the terms of the security are evidenced in writing (but see section 14A); (fb) if: (i) under section 267 or 267A of the Personal Property Securities Act 2009 or section 588FL of the Corporations Act 2001, a security interest would, but for this paragraph, vest in the grantor before the external administration begins; and (ii) where the security interest did not vest under one of those sections before the external administration begins, the security would be enforceable under paragraph (fa); the security interest does not vest under that section before the external administration begins; (g) none of the following is to be void or voidable in the external administration: (i) the netting or termination of obligations under the contract; (ii) a payment by the party to discharge a net obligation under the contract; (iii) the enforcement of security under paragraph (fa); (h) paragraphs (c) to (g) apply despite: (i) any disposal of rights that may be netted under the contract; or (ii) the creation of any encumbrance, or any other interest, in relation to those rights or financial property mentioned in paragraph (fa); or (iii) the operation of any encumbrance, or any other interest, in relation to those rights or that financial property; in contravention of a prohibition in the contract, or in the security mentioned in paragraph (fa). > Note: By giving express recognition to close‑out netting contracts, subsections (1) and (2) remove the basis for arguing that the contracts are void as contrary to public policy embodied in the laws dealing with insolvency. (3) Subsections (1) and (2) have effect in relation to a close‑out netting contract: (a) subject to a specified stay provision that applies to the contract; and (b) despite any other law (including the specified provisions). > Note 1: Section 5 defines specified provisions and specified stay provision. > Note 2: Division 2 sets out the circumstances in which non‑direction stays may cease. (4) A person may not rely on the application of subsection (1) or (2) to a right or obligation under a close‑out netting contract if: (a) the person acquired the right or obligation from another person with notice that that other person, or the other party to the contract, was at that time unable to pay their debts as and when they became due and payable; and (b) the person acquired the right or obligation otherwise than as a result of the operation of section 22, 35 or 36R of the Business Transfer Act. (5) Subsection (1) or (2) does not apply to an obligation owed by a party to a close‑out netting contract to another person if: (a) the party goes into external administration; and (b) the party acquired the obligation otherwise than as a result of the operation of section 22, 35 or 36R of the Business Transfer Act; and (c) subsection (6) is satisfied. (6) This subsection is satisfied if any of the following are satisfied: (a) the other person did not act in good faith in entering into the transaction that created the terminated obligation; (b) when that transaction was entered into, the other person had reasonable grounds for suspecting that the party was insolvent at that time or would become insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) doing an act, or making an omission, for the purposes of giving effect to the transaction; (c) the other person neither provided valuable consideration under, nor changed their position in reliance on, that transaction. (7) None of the following things done by a party to a close‑out netting contract, while it is under statutory/judicial management and a specified stay provision applies to the contract, is to be void or voidable in an external administration: (a) making a payment, or transferring property, to another person to meet an obligation under the contract; (b) creating rights or obligations in another person under the contract; (c) giving any security to another person in relation to the contract; (d) entering into one or more close‑out netting contracts with another person; (e) doing anything mentioned in paragraph (a), (b) or (c) under a close‑out netting contract mentioned in paragraph (d). (8) Subsection (7) does not apply to a thing mentioned in that subsection done by a party to a close‑out netting contract in relation to another person if: (a) the transaction did not result from the operation of section 22, 35 or 36R of the Business Transfer Act; and (b) either of the following is satisfied: (i) the other person did not act in good faith in entering into the transaction; (ii) the other person neither provided valuable consideration under, nor changed their position in reliance on, the transaction. (9) If security is given over financial property, in respect of obligations of a party to a close‑out netting contract, then: (a) subsection (3) applies in relation to the security in the same way as it applies in relation to the contract; and (b) subsection (4) applies in relation to rights and obligations under the security in the same way as it applies in relation to rights and obligations under the contract; and (c) subsection (5) applies in relation to an obligation owed by a party to the security in the same way as it applies in relation to an obligation owed by a party to the contract; and (d) subsection (7) applies to things done by a party to the security in relation to the security, or a right or obligation under the security, in the same way as it applies in relation to things done by a party to the contract in relation to the contract, or a right or obligation under the contract.