New ‘ipso facto’ amendments provide a stay on the enforcement of insolvency termination clauses in certain circumstances

Key Points​

• Ipso Facto Clause changes will come into effect for all contracts entered into after 1 July 2018.

• The changes will affect how contracts operate where a number of financial stability and solvency related events occur.​

The changes will come into effect for all contracts entered into after 1 July 2018.

What is an ‘ipso facto’ clause ?

An ‘ipso facto’ clause in a contract generally allows a party to terminate a contract for default where the other party experiences an insolvency event (such as liquidation or voluntary administration).

The Changes

The Corporations Act [1] will now prevent a party from enforcing rights to amend or terminate a contract merely because the other party experiences a formal insolvency event (Ipso Facto Amendments).

The Ipso Facto Amendments will apply to new contracts entered into after 1 July 2018.

The Ipso Facto Amendments will apply where:

• (Schemes of Arrangement) a ‘body’ publically announces applies for and enters into a scheme of arrangement for the purpose of avoiding being wound up in insolvency;
• (Controller or receiver to whole (or substantially whole) of property) a managing controller or receiver is appointed to the whole, or substantially the whole, of a ‘corporation’s’ property. Not where  there is only a limited appointment of a receiver to specific property; or
• (Voluntary administration) a ‘company’ enters into voluntary administration.

The Ipso Facto Amendments will not apply:

• (Company in liquidation unless it was in voluntary administration) to a company in liquidation, unless the company was in voluntary administration before it went into liquidation;
• (Insolvent trading) if the company engaged in insolvent trading; or
• (consent given) if the liquidator, administrator, or administrator has provided their consent for the right to be enforced.

Parties to a contract cannot contract out of the Ipso Facto Amendments. Any contrary contractual rights will be unenforceable.

Certain types of contracts excluded

The Ipso Facto Amendments will not apply to these types of contracts:

• where an Australian company offers or issue of securities;
• for the sale of a business;
• for underwriting securities of financial products (including shares or insurance);

Assignments, novations and variations

The Ipso Facto Amendments will not apply to:

• Novation or assignment agreements entered into on or after 1 July 2018 that novate or assign rights under an agreement entered into before 1 July 2018; and
• Variation agreements entered into or renewed after 1 July 2018 that vary an agreement or arrangement entered into before 1 July 2018.

Certain rights in contracts not affected

The Ipso Facto Amendments may not affect:

1. default interest under a financing agreement;
2. indemnity costs under a financing agreement that arise as a result of the company entering into one of the numbered insolvency-related processes;
3. set-off rights;
4. some step-in rights; and
5. ipso facto termination rights suspended or reserved under a forbearance agreement.

Things to consider

Key for any business or government body entering into these arrangements is:

• Awareness – any business or government body should be aware of these Ipso Facto Amendments and the associated risks that may accompany them. This extends to contract management and selecting who to contract with.
• Varying or amending existing arrangements where possible – the  Exceptions allow ipso facto clauses to remain in amended or varied contracts where the initial contract was entered prior to 1 July 2018. However there are a number of other considerations to be had when considering to vary a contract as opposed to a new contract. This is a relevant consideration especially where there is questionable financial viability and circumstances in the counterparty.
• Inclusion of ipso facto rights “subject to the Ipso Facto Amendments” – while the Ipso Facto Amendments do significantly limit the options of a party seeking to terminate on the basis of certain insolvency and financial viability events, the ipso facto clauses may sometimes still apply in certain circumstances. As such, it is still prudent to include ipso facto clauses subject to the Ipso Facto Amendments (broadly). Worded correctly, this provides for future potential change to the Ipso Facto amendments as introduced and changed over the lifespan of a contract.

[1] Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth)

Post by Jack Guthrie, David Fischl, Marc Rossi and Chris Moore