The new ipso facto regime enacted by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 in 2017 amends the Corporations Act 2001 (Cth) (Act) by introducing a “stay” to the enforcement of contractual ipso facto provisions that are triggered upon the occurrence of certain insolvency related events. The amendments apply to all contracts entered into on and from 1 July 2018, and aim to enable businesses to recover and rehabilitate following certain insolvency-related events and formal restructures.
What is an “ipso facto” clause?
Ipso facto clauses, commonly known as “termination provisions” in a broad range of contracts, allow a party to a contract to terminate or modify the contract upon the occurrence of certain insolvency and restructuring processes. Generally, an ipso facto clause will be triggered in circumstances where an administrator, liquidator, receiver or controller is appointed to a party to the contract; or where a subcontractor, service provider or other contractual counterparty enters voluntary administration, receivership or a scheme of arrangement. Termination under ipso facto clauses is triggered and enforceable, regardless of otherwise continued performance by the counterparty.
How does the new regime operate?
Under the new regime, the enforcement of ipso facto clauses is limited by imposing a “stay” on a counterparty’s right to enforce a provision to terminate or exercise a right under a contract as a consequence of a counterparty entering into voluntary administration or a scheme of arrangement.
The “stay” operates only in the following cases:
where a company enters into restructuring administration;
where a company enters into an arrangement to avoid being wound up in insolvency; or
where a managing controller or receiver is appointed.
The stay on enforcement of ipso facto provisions is intended to assist viable companies to successfully restructure without disrupting their business, prejudicing their goodwill and potentially preventing their ability to sell their business as a going concern. Importantly, the amendments to the Act do not prevent a counterparty from enforcing its right to terminate or exercise a right under a contract for other breaches of contract such as failure to perform or meet payment obligations.
Which contracts are excluded from the regime?
The amendments outline the types of contracts and contractual rights that are excluded from the new regime. These include:
sale of business agreements;
contracts arising from a novation, assignment or variation that were entered into before 1 July 2018;
subscription arrangements for securities or financial products;
arrangements for underwriting the issuance or sale of securities products; and
arrangements for the keeping of source code in escrow.
Which contractual rights are excluded from the regime?
The amendments do not limit the counterparties’ rights to:
terminate the contract for reasons unrelated to a counter party’s external administration (e.g. breach of contract arising from non-payment or non-performance);
enforce a higher rate of interest under a contract;
set-off amounts owing by the debtor party against amounts owing by a counterparty; and
appoint a controller over a debtor party’s assets where a counterparty has an enforceable security interest over those assets (e.g. rights secured under a security agreement).
What does this mean for businesses?
In light of the recent amendments, we encourage everyone entering into contracts with corporate counterparties to familiarise themselves with the ipso facto regime, review all contracts entered into on or after 1 July 2018 and make appropriate amendments, if necessary, to mitigate the contractual risks that may arise as a result of the amendments.
If you would like further information about the ipso facto regime and how it applies to you or your business, please contact Urban Lawyers.