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Update –  2 July 2018

The new Ipso Facto clause stay regime is now in effect

On 1 July 2018 the Federal Government’s new ipso facto clause stay regime became law.  The regime operates to stay the rights of parties to certain contracts to prevent them terminating or modifying the contract if another party becomes insolvent through either voluntary administration, receivership or a scheme of arrangement to avoid winding-up.

The rationale for the new regime is to assist struggling businesses to trade out of their difficulties, successfully restructure or sell the business as a going concern.

The ipso facto clause stay regime

The ipso facto regime was enacted in the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017, which inserted the relevant provisions into the Corporations Act 2001.

What is an ipso facto clause

An ipso facto clause is a provision in a contract which either entitles a party, or provides that something happens automatically, upon an event of insolvency. By way of example, an ipso facto clause may provide that a party can terminate the contract if the other party appoints an administrator, or alternatively, that the contract terminates immediately in that event.

The regime

The new regime has the effect of staying the rights conferred by an ipso facto clause when the clause is triggered by a corporate party to it:

  • announcing that it will enter a scheme of arrangement;
  • entering into receivership;
  • being placed under administration;
  • being in the financial position of the above circumstances; or
  • a reason that it is “in substance contrary” to the regime.

The stay

An ipso facto clause which is triggered by one of these events is unenforceable for a period of time after being triggered. The stay lasts, as the case may be, until:

  • three months after the announcement;
  • when an application is finalised;
  • when the company is wound up; or
  • when the receivership ends.

The Court also has powers to make orders in relation to the stay, including that it be extended or that it not apply.

Application

The stay only applies to new contracts entered into after 1 July 2018 and does not apply to rights, including termination rights, arising from breaches of contract not associated with insolvency (for example non-payment or failure to provide relevant services).

There are extensive exclusions from the regime which make the application of it less than straightforward.  The exclusions involve either certain types of contracts as a whole and also certain clauses contained in contracts.

Excluded contracts

There are over thirty categories of contracts which are excluded from the regime. By way of example only, these include contracts or arrangements:

  • for the underwriting of an issue, or sale, of securities, financial products, bonds, promissory notes, or syndicated loans;
  • for the sale of all or part of a business, including by way of the sale of securities or financial products;
  • involving a special purpose vehicle;
  • relating to securities and financial products;
  • involving complex arrangements between sophisticated parties;
  • relating to debt and the ranking of creditors;
  • for public services, such as the supply of products to the Commonwealth.

Excluded clauses

There are also a number of types of clauses which are excluded from the ipso facto clause stay regime, regardless of the type of contract in which such clauses are contained. Some of these excluded clauses include those providing for:

  • termination rights in a standstill or forbearance arrangement;
  • rights to change the priority in which debts are to be paid;
  • rights of set-off and acceleration of such rights;
  • rights of assignment, novation or otherwise for the transfer of rights or obligations.

Take-out

In general, where applicable, parties should still include ipso facto clauses in contracts, but they need to understand whether and/or the extent to which such clauses may be affected by the ipso facto clause stay regime.  In particular, parties should be aware that generally they will not be able to rely on an ipso facto clause to terminate an agreement during the stay period where the contract or provision is subject to the regime and this should be given due consideration when entering the contract at the outset.