Ipso Facto Clause Stay

  • Stage 2 of the Governments two staged legislative reform roll out becomes effective on 1 July 2018 with a stay on Ipso Facto clauses in contracts.
  • Where there exists a suspicion of insolvency or fears that insolvency may become an issue, the Treasury Laws Amendment (Enterprise Incentives No 2) Bill 2017 provides a Safe Harbour for directors against insolvent trading personal liability – this became effective on 19 September 2017.
  • Ipso Facto clauses are clauses in contracts that permit the termination or modification of a contract upon an insolvency event (for example, a voluntary administrator being appointed).

Placing a Stay on Ipso Facto Clauses

  • It has long been considered that parties enforcing their contractual rights to terminate upon formal insolvency destroys the viability and value of a company’s business and assets which an insolvency practitioner is attempting to realise for the benefit of creditors.  
  • The reasoning behind the reform is that potentially salvageable businesses are unable to be rescued, restructured or reconstructed – this results in a lower chance of saving employees jobs and an overall lower return to creditors. Leading professional bodies, such as the Turnaround Management Association, have been at the forefront working with the Treasury for the ‘Safe Harbour’ legislative reform and the ‘Ipso Facto’ provisions.
  • Logically, there is a domino effect – especially with regards large enterprises. Failure begets failure. Unemployment rates rise, and the company’s unsecured creditors may struggle financially as a result.

Stay on Enforcement

The stay on enforcement includes Ipso Facto clauses regardless of whether they are automatic or are exercised on discretion of the party. The trigger for the stay is:   

  • appointment of a voluntary administrator;
  • appointment of receivers and managers over substantially all of the assets (for eg, by a lender); or
  • a company being subject to a scheme of arrangement (a restructuring compromise agreement with creditors that is administered through the courts).

However, it is critical to note that a party may still exercise a termination clause based on a default for non-payment or non-performance. Also, a termination clause may be enforced following written consent of the voluntary administrator or receiver or by a court order.

Existing or Amended Contracts

The Ipso Facto provisions are being grandfathered and will only apply to contracts entered into after 1 July 2018. Therefore, the automatic stay on Ipso Facto clauses will not apply to contracts entered into prior to 1 July 2018 – even where the contract is amended after this date. In our opinion, this will encourage parties to amend contracts rather than enter into new contracts so as to retain the benefit of existing Ipso Facto rights.