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 but Ipso Facto is now on the horizon.
There are even more changes due to take effect on 1 July 2018 with the new legislation designed to encourage a ‘rescue culture’ in Australia (National Innovation and Science Agenda). 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.
We are collaborating with Stanley & Co Lawyers to provide a ‘fixed fee’ review of your clients contracts and agreements ahead of the new legislation becoming effective on 1 July 2018. This helps protect your clients’ business in the event of suppliers or customers entering into formal insolvency, administration or a restructuring.
Ipso Facto literally means ‘by that very fact or act’. 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.
- A key component of the Treasury Laws Amendment (Enterprise Incentives No 2) Bill 2017 is the ‘Ipso Facto’ clause stay – this is aimed at preventing parties to a contract from terminating due to initiating a formal insolvency regime or restructuring process (or taking steps to do so). Also, a contract is not able to be terminated simply due to the business’s financial position.
- Under existing laws when a business enters into administration it faces immediate value destruction as suppliers and large customers simply terminate contracts and seal the fate of the business. The reform, which becomes effective on 1 July 2018, puts a stay on exercising ‘ipso facto’ clauses so that businesses in financial difficulty get some ‘breathing space’. There will be an opportunity to return the business to solvency or, if insolvency is suspected in the future, they may begin restructuring and turnaround.
- This is something to be cautious about when sitting on the other side of the table. If your business supplies to a customer and they enter administration, you are no longer able to terminate the supply contract based on the terms contained within.
It should be noted that the Ipso Facto provisions are being grandfathered and will only apply to contracts entered into after 1 July 2018 which will create different regimes and, in our opinion, should encourage parties to amend existing contracts rather than enter into any new contracts – so as to retain the benefit of your clients’ existing ipso facto rights.