From 1 July 2018, amendments introduced into the Corporations Act 2001 (Cth) impose a stay on the enforceability of what the legal profession refer to as “Ipso Facto clauses” in relation to certain insolvency events.
An Ipso Facto clause is a clause in a contract which permits termination of the contract, on the occurrence of a certain event, such as an insolvency event. Ordinarily the term ‘insolvency event’ is broadly defined in the contract to include all types of financial difficulty, such as if a voluntary administrator is appointed, a controller is appointed, the company enters into a Deed of Company Arrangement with its creditors, receivers or managers are appointed to the company, the company is insolvent or deemed to be insolvent, and a person has committed an act of bankruptcy.
Not all types of insolvency events are covered by the reforms. The effect of the new legislation is that it will prevent a party from seeking to terminate a contract on the occurrence of certain insolvency events, namely voluntary administrations and where a managing controller has been appointed to the company. The legislation will not operate to stay termination clauses if the company is insolvent.
The rationale behind the introduction of the Ipso Facto law reforms is to enable contracts to continue in the event a company has entered voluntary administration to restructure its affairs and enable companies to attempt to trade out of financial difficulties. The aim of the reforms, as set out in the Explanatory Statement is “to promote a culture of entrepreneurship and innovation which will in turn reduce the stigma of failure and help drive business, growth, local jobs and global success”. One such example where these reforms will be particularly relevant is in the building and construction industry. If a builder or developer company has various construction projects on foot but is encountering a period of financial difficulty and has thus entered into voluntary administration, the legislative reforms will prevent a party to a contract with the builder or developer from terminating the contract due to the mere fact that the company has entered into voluntary administration.
It should be noted however, that the law reform does not apply to all types of contracts, and specifically excludes, as examples, agreements for sale of business, government licences, and certain agreements relating to securities.