The Commonwealth Government has introduced reforms to the insolvency regime which will change the way in which ipso facto clauses in contracts operate on the occurrence of an insolvency event.
These reforms come into effect on 1 July 2018.
What are ipso facto clauses?
Ipso facto clauses are provisions in contracts that allow a party to terminate or modify a contract on the occurrence of an insolvency event, such as the appointment of an administrator.
The enforcement of ipso facto clauses (particularly termination clauses) by counterparties during the administration, receivership or formal restructure of a company often:
Many see this as being especially harsh in circumstances where a company otherwise continues to perform its obligations under a contract.
For these reasons, the Commonwealth Government has introduced reforms which limit the enforceability of ipso facto clauses in certain insolvency scenarios.
What is changing?
From 1 July 2018, counterparties will not be able to enforce ipso facto clauses against companies in circumstances where the right is enforced because a company:
Which contracts are affected by the changes?
The reforms only affect rights arising under contracts entered into after 1 July 2018.
This means that the changes do not affect:
What types of contractual rights are affected?
The reforms place a stay on “the enforcement of a right” under a contract.
Until such time as the courts give greater clarity to the scope of this phrase, we expect that rights that are likely to be affected include:
The stay on enforcement captures ipso facto clauses regardless of whether they are self-executing (automatic) or exercised at the discretion of the counterparty.
What events trigger the stay on enforcement of ipso facto clauses?
The stay on enforcement of an ipso facto clause will be triggered if the counterparty seeks to rely on:
In addition, a counterparty will not be able to rely upon the “financial position” of a company experiencing one of the above events to enforce an ipso facto clause.
A counterparty may still exercise its contractual rights (including termination) on the basis of another default (i.e. any reason other than those listed above). For example, a counterparty may still terminate a contract on the basis of non-payment or non-performance.
Are there any exceptions?
Yes. The stay on enforcement of ipso facto clauses will not apply to:
Despite the stay on enforcement of an ipso facto clause, it will be possible to enforce such a clause if the counterparty obtains:
James Roland, Partner, Sydney
Clementine Woodhouse, Associate, Sydney