Ipso facto clauses

From 1 July 2018, part two of the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Amending Act) will commence and place a ‘stay’ on ipso facto clauses in contracts by preventing the enforcement of such a clause where a company enters into administration, where the company is undertaking steps to avoid being wound up in insolvency or an appointment of a managing controller over all, or substantially all, of the company’s property. The stay on ipso facto clauses has been introduced in order to prevent third parties from terminating key contracts just because a company has commenced an insolvency process and potentially force a wind up of a company which otherwise might have become profitable again.

The period of the stay is as follows for each of the relevant insolvency processes:

Process covered by the stay Commencement of stay period Expiry of stay period
Scheme of arrangement (s 415D of the Act) When a public announcement or scheme application is made under s 411 of the Act.
  • The stay ends after 3 months if a s 411 application is subsequently not made;
  • when a s 411 application is dismissed;
  • when the scheme of arrangement ends; or
  • if a resolution or order is made to wind up the company when the company is finally wound up.

(s 434J of the Act)

When the managing controller or receiver is appointed. When the managing controller or receiver’s control ends.
Voluntary administration (s 451E of the Act) When the company enters administration. When the administration ends, or when the company is fully wound up if an order or resolution is made that the company be wound up.

Importantly it should be noted that:

  • the Amending Act does not alter the rights of a party to terminate or modify a contract where there is a breach of the terms or obligations of the contract such as where a party has failed to make payments;
  • the stay on ipso facto clauses will not only apply to contracts entered into before 1 July 2018. Parties currently negotiating contracts may be able to negotiate for clauses that provide for similar treatment where the contract will be executed prior to this date.
  • the amendments contain anti-avoidance provisions that have the effect of suspending any contractual right which is ‘in substance’ contrary to the provisions” noted above.
  • As ipso facto clauses can be found in almost every contract, all businesses should review their contracts and consider whether amendments should be made to ensure that their rights are preserved in the event of default and whether any additional steps should be taken to mitigate the risk of a default.

Recommended for you: Ipso Facto and Safe Harbour: Recent Changes

If you have contracts that need to be reviewed in light of these changes, please contact us.

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