Changes to Ipso Facto Termination Rights

Many commercial contracts contain clauses which entitle a party to terminate the contract or exercise other contractual rights where the counterparty suffers an insolvency event (such as the appointment of a voluntary administrator or receiver or the entry into a scheme of arrangement with creditors). That is, by the mere fact itself (“ipso facto”) that an insolvency event is suffered will usually enable the other party to terminate.

As of 1 July 2018, the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017 (Cth) (Act), restricts the ability of parties to enforce ipso facto clauses against counterparties who are companies where an administrator or receiver is appointed or where a counterparty becomes subject to a creditors scheme of arrangement. This is because ipso facto provisions have been viewed as unfairly restricting an insolvent company’s ability to sell its distressed business or restructure itself, therefore potentially limiting creditors’ rights. The Act (which amends Chapter 5 the Corporations Act 2001 (Cth)) provides an automatic stay on the enforceability of ipso facto provisions in certain types of contracts entered into after 1 July 2018 where they arise in relation to the above-mentioned insolvency events (some contracts, agreements and arrangements prescribed in the Regulations will be excluded).

The period of the stay on enforcement of ipso facto clauses will depend upon the type external administration involved (for example, where a company is under an administration, the stay will commence on the appointment of the administrator and end when that appointment ends).

Under new section 434K of the Corporations Act 2001 (Cth), the Court may order the stay does not apply for one or more rights against a company if the Court is satisfied that this is appropriate in the interests of justice.  That is, the Court, upon application by a party, may lift the stay.

The application and effect of the stay should be considered closely by parties wishing to enforce ipso facto rights against counterparties. In this regard, parties who attempt to exercise ipso facto contract termination or contract alteration rights in new contracts after 1 July 2018 against insolvent counterparties may expose themselves to liability for wrongful repudiation of the relevant contract.

For more information please on this topic please contact Nicholson Ryan Lawyers on +61 3 9640 0400 or admin@nrlawyers.com.au