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Ipso Facto Reforms - Are your contracts affected?

On 1 July 2018 further reforms to the Corporations Act 2001 (Cth) known as the Ipso Facto Reforms came into effect, impacting a broad range of contracts entered into on or after that date.

In light of the changes, businesses of all types and industries need to familiarise themselves with the new reforms and consider the possible impact which they might have on their contracts.

What are Ipso Facto Clauses?

Ipso facto clauses are provisions in contracts that allow a party to terminate or modify a contract upon the occurrence of a specific event, usually an insolvency event. These provisions are standard in a lot of commercial agreements, leases and finance agreements, and are often framed as a right to immediately terminate an agreement merely because the other party has suffered an event. They also enable a party to call upon security (such as a bank guarantee), cease providing credit or advancing funds, and suspend services, works or the supply of goods.

What are the new Ipso Facto reforms?

From 1 July 2018, ipso facto clauses (and certain other contractual rights) are now temporarily unenforceable where a party enters into certain specified formal insolvency processes in an attempt to restructure its financial affairs, namely:

  • Voluntary administration;
  • Schemes of Arrangement – a compromise or arrangement aimed at avoiding being wound-up in insolvency; or
  • Receivership – when a managing controller has been appointed over all, or substantially all of the property of the company.

The temporary stay on enforcement of ipso facto clauses applies irrespective of whether the clauses enable automatic or discretionary termination of agreements, however, the stay ends when the company enters into liquidation and/or when the company fails to perform its contractual obligations under the contract.

The court may also lift the stay if it is satisfied that the relevant restructuring arrangement is for the purpose of avoiding the company being wound-up in insolvency, or if it is otherwise appropriate to order so.

How long is the stay effective?

The length of the operation of the stay will depend on the nature of the external administration. For a voluntary administration, the stay will begin when the company enters into administration and end when the administration ends or when the company is wound-up. For a receivership, the stay will begin when the managing controller or receiver is appointed and end when the managing controller or receiver’s control ends. For Schemes of Arrangement they will begin when a public announcement or scheme application is made, and end 3 months after the announcement, when the application is unsuccessful or dismissed, or when the company is wound-up.

Can a business contract opt-out of the Ipso Facto Reforms?

The ipso facto reforms contain anti-avoidance provisions which prevent contractual clauses that attempt to circumvent the new legislation. This is achieved by suspending a contractual right to terminate that arises for a reason that is contrary to the regime “in substance”.

Are there any exclusions from the Ipso Facto reforms?

The Federal Government has recently released draft regulations which contain proposed exclusions to the Ipso Facto reforms including arrangements relating to securities and financial products such as derivatives, underwriting securities or financial products, sale of business and margin lending facilities amongst others. As these draft exclusions are only in their early stages, with public consultation only recently coming to a close, businesses should proceed on the basis that any contracts that they enter into after 1 July 2018 which give them or a counterparty a right to terminate or modify a contract in the event of insolvency, are no longer entirely enforceable.

If you are concerned about your business’ or company’s contracts and the effects that the new Ipso Facto reforms may have on them, contact Russell Kennedy 02 8987 0000 to discuss how we can assist you and ensure that any rights currently activated by an insolvency event remain available to you and your company or business is not exposed to any further risk as a result of the reforms.

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