Ipso Facto Clauses Stay – Exclusions

Ipso Facto Stay – ’24 days left to have your say’

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 brought into play two initiatives to help salvage distressed businesses – Safe Harbour and the stay on Ipso Facto clauses. The second phased roll out, the ipso facto reform, will shortly be in place following today’s release of a consultation version of the regulations. Interested parties have been invited to comment on the consultation. Responses to the consultation can be submitted up until 11 May 2018.

Business Rescue

Previously the regimes in Australia have been deemed too strict and created a disincentive for directors to participate in restructuring. A set of incentives needed to be implemented that encouraged directors to act early and to seek advice to determine if a restructuring is possible and if so whether it should be implemented (see Jason Harris, 2015, ‘The effect of voluntary administration on business restructuring’). 
  • Basically, potentially salvageable businesses were 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 to the knock on effect following the failure of 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 stay kicks in on:

  • 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.

Exclusions to the Stay 

The final details were always intended on being pinned down prior to the legislation coming into effect. It is our opinion that the exclusions detailed in the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 are relatively straight forward, logical and sensible:

  • the ipso facto stay does not apply to arrangements that are licences or permits issued by the Commonwealth, a State or a Territory, an authority of the Commonwealth or of a State or a Territory, or a local government, such as a council.
  • the stay will not apply to derivatives, securities or financial products, margin lending facilities and invoice finance arrangements.
  • an ipso facto stay will not apply to contracts to which a special purpose vehicle (SPV) is a party. An SPV is an entity such as a company, trust or partnership that is created to carry out a specific business purpose or activity. For example, SPVs can play an integral part of asset securitisation arrangements.
  • the stay will not affect contractual rights to combine or set off multiple accounts.
  • there are specific protections for secured creditors to be able to appoint receivers and controllers.

Contract Reviews

The Ipso Facto stay will not apply to contracts entered into before 1 July 2018, even where they have been modified after after that date. 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.