Facts on Ipso Facto - when 'by that very fact or act' is not enough.
What are Ipso Facto clauses?
Ipso Facto means 'by that very
fact or act' - an
ipso facto clause is a contractual
provision allowing one party to terminate or modify the operation of a contract
upon the occurrence of a specified insolvency event.
Australia's new ipso
facto regime came into effect as of 1 July 2018. The regime stays the
enforcement of contractual rights when a corporate Counterparty enters
restructuring or insolvency procedures.
Purpose of the New Regime
The reform is designed to improve the likelihood of an
insolvent company trading and recovering from an insolvency event. A party
modifying or terminating an agreement with a Counterparty may seriously affect
cash flow and consequently inhibit their return to
ability to conduct business; and
reduce or eliminate returns in liquidation.
The regime operates by limiting a Counterparty's
ability to terminate a contract based on the company entering an insolvency
event or the financial position of the party. The following provisions stay a
party's right to enforce an insolvency clause:
a) when a company enters administration (subsection
b) where a managing controller has been appointed over
the company's property (subsection 434J(1)); or
c) where the company is undertaking a compromise or
arrangement for the purpose of avoiding being wound up in insolvency (section
The period of stay exists until the administration,
receivership or the scheme of arrangement ends, unless the company is wound up,
or the company applies to the Court to extend the period of
Statutory Amendment and Benefit
regime was enacted in September 2017 through the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017.
Part 2 of the Act amends the Corporations
Act 2001 (Cth) as of 1 July 2018 by inserting sections that provide for the
operation of the ipso facto stay for
certain corporate restructuring and insolvency procedures.
Anti-avoidance provisions are included in the Act
which intend on capturing contract terms that attempt to circumvent the Act.
They prohibit the enforcement of rights for reasons that are 'contrary in
substance' to the new provisions. Terms that allow a party to terminate for
reasons relating to a company's financial position would be also be captured.
However, the explanatory memorandum expressly states that companies are free to
terminate contracts for other reasons, such as non-performance of contractual
An instance where there may be ambiguity is whether a
party can draw down on bank guarantees in the event of the Counterparty
entering administration, this may be contrary to the provisions under
regime benefits contractual Counterparties' by ensuring they are not penalised
due to financial distress, providing they continue to meet their contractual
The Act provided for the following exemptions:
a) if the administrator consents to the enforcement
of the term;
b) if the company enters into
c) various types of contracts are exempt â€“ See Corporations Amendment (Stay of Enforcing
Certain Rights) Regulations 2018 (including licences issued by the government
or contracts for the sale of a business, contracts for building work in which
the total payments exceed $1 billion); and
d) the Court may order that rights are enforceable
against a body with leave of the Court and in accordance with such terms as the
Court imposes. For example, the order could be sought for a right to terminate
for convenience (Section 451F).
Regime Might Affect You
These provisions are applicable to contracts entered
from 1 July 2018. Contracts will need to be drafted to ensure that parties' rights
are protected in situations of default. In particular, the contract should
clearly identify the material terms and conduct that constitute a material
breach of the contract that give rise to the right to terminate. Parties retain
the option to apply to the Court for an order to enforce their rights in the
How the Courts will interpret the new regime is yet to
For advice on the operation of the new ipso facto
provisions and any contractual matters call the Integra Team.
article was prepared by Integra Legal and we have taken great care to ensure
the accuracy of the contents. However, the article is written in general terms
and you are strongly recommended to seek specific professional advice before
taking any action based on the information it contains.