A recent Federal Government regime commencing on 1 July 2018 may affect the operation of insolvency clauses in contracts entered into on and from 1 July 2018. The types of clauses that may be impacted are clauses allowing a party to terminate or change the operation of a contract if another party to that contract becomes insolvent.
This Federal Government regime was introduced primarily under the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), and is commonly described as the ipso facto regime (Regime).
What is an ipso facto clause?
An ipso facto clause is effectively a bankruptcy or insolvency clause whereby a party is permitted to exercise its rights to terminate a contract due to the bankruptcy or insolvency of the other party.
How are insolvency clauses affected?
The ipso facto regime changes the functionality of insolvency clauses in contracts by placing a stay on a party’s right to terminate or change the operation of the contract, unless excepted. That means that any action that can be taken by a party against another party (ie such as the right of one party to terminate the contract in the event of the insolvency of the other party) would be put on hold, unless an exception applies.
Notably, under the Regime, while a stay is in place on an ipso facto clause, the company the subject of an insolvency event may not exercise any right it may have under the contract to request an advance of money or to request credit from the other party.
What types of insolvency events are affected?
The following are examples of the types of insolvency events we have seen in contracts to which the Regime applies:
- Company Arrangement – an arrangement between a company and the creditors of that company (for the purpose of avoiding being wound up) that is put in place to determine how the company’s affairs will be dealt with;
- Receivership – in the event a controller or manager is ...