Changes to the legal effect of “Ipso Facto” clauses

In 2018
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Changes to the law regarding ‘ipso facto’ clauses in contracts will apply to contracts entered into after 30 June 2018.[1] The changes will prevent (or “stay”) a party from immediately being able to enforce a right to suspend or terminate a contract that arises due to the counterparty facing an insolvency event.

What is an ipso facto clause?

Ipso Facto clauses are commonly found in commercial agreements. An example is as follows:

“This Agreement shall terminate, without notice, upon either party entering into voluntary administration, liquidation or receivership or any proceeding for the settlement of either party’s debts as the case may be.”

The current law permits a party to enforce a contractual term like this. This includes in circumstances where an administrator has been appointed, where a company is undertaking arrangements to avoid administration or where a receiver or controller has been appointed.

While these types of clauses are common in many commercial contracts, they can have harmful effects on the counterparty. In particular, they can damage the value of a business that requires the contract to remain on foot in order to restructure, rejuvenate or sell the business as a going concern.

Operation of the New Provisions

The changes mean that a “stay” kicks in from the moment the insolvency event commences (e.g. the appointment of a receiver or administrator or the company entering into a scheme of arrangement). The length that the stay remains in operation will depend upon the type of insolvency event the party is facing.

The new provisions also operate as “anti-avoidance provisions.” They disallow contractual clauses intended to get around the new regime despite not appearing to be “ipso facto” clauses on the face of the contract.

Key Takeaway

Companies intending to rely on and enforce ipso facto provisions in their contracts should ensure that those contracts are entered into prior to 30 June 2018. For more information on lawfully entering into contracts on behalf of a company, visit us here.

These reforms are part of the Turnbull Government’s “innovation agenda” aimed at financially supporting startups and driving a more entrepreneurial society.

[1] Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017

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