The newly-introduced ipso facto laws aim to improve the likelihood of a successful restructure by preserving the standing of contracts (and hence goodwill in contracts) after filing for insolvency. We take a closer look at the new reforms which began operation on 1 July 2018.

Relevant terms

Act:  Treasury Law Amendments (2017 Enterprise Incentive No 2) Act 2017 (Cth)

Stay: Automatic “stay” on enforcing an ipso facto clause pursuant to the new ipso facto regime in ss 415D, 434J or 451E of the Act

What is an ‘ipso facto’ clause?What is an ipso facto regime?

An ipso facto clause is a provision:

  • in a contract which allows a party to terminate or modify the operation of the contract; and
  • which activates upon the occurrence of some specific event, such as:
    • a counterparty’s insolvency; or
    • the commencement of formal insolvency proceedings regardless of the counterparty’s otherwise continued performance of its obligations under the contract.

Many different contracts contain ipso facto clauses, especially in design and construction, supply, operations, and maintenance.

What’s the problem with ipso facto clauses?

In a report which was handed to the Federal Government on 30 September 2015, the Productivity Commission observed that ipso facto clauses can:

  • severely constrain the ability of a business to continue trading during a restructure; and
  • reduce the scope for a successful restructure or prevent the sale of a business as a going concern.

On 19 September 2017, the Act was enacted to address the Productivity Commission’s concerns. As well as dealing with ipso facto clauses, the Act also introduced the safe harbour reforms which were the subject of our December newsletter.

What are the ipso facto reforms?

The ipso facto reforms contained in the Act commenced on 1 July 2018. Other than the exemptions described in the next section, these reforms apply to all contracts entered into after that date.

Under the Act, the enforcement of ipso facto clauses will be stayed automatically in the following circumstances:

  • a company enters voluntary administration
  • a managing controller is appointed over all or substantially all of a company’s property
  • a company is the subject of a compromise or arrangement (or publicly announces it will apply to undertake a compromise or arrangement) to avoid being wound up in insolvency

The ipso facto reforms will have no impact on a party’s right to terminate for reasons unrelated to the ipso facto clause, including non-payment and non-performance.

However, a court may prevent a party from terminating a contract for a purportedly unrelated reason if it appears that the termination relates to the occurrence of an insolvency event.

Are there any exceptions?What is an ipso facto regime?

The Act’s regulations can prescribe, or the minister can declare, types of contracts or rights to which the stay will not apply.

The regulations and declaration which were made prior to the commencement of the ipso facto reforms provide exclusions to the ipso facto regime for contracts and contractual rights in the following categories:

  • special purpose vehicles (“SPV”)
  • bonds, promissory notes and syndicated loans
  • derivatives
  • approved netting arrangements
  • flawed asset arrangements
  • underwriting and subscription agreements
  • novations and assignments of contracts entered into before 1 July 2018
  • default interest clauses
  • set‑off rights and rights to combine accounts
  • margin lending facilities 

The basis upon which many of the contracts and contractual rights listed above have been excluded from the ipso facto regime is the sophistication of the parties involved.

For such sophisticated parties, it seems the policy favoured most remains 'business as usual'.

Obviously, it will be some time before Australian businesses adjust fully to the stay and its many exceptions.

FOR MORE INFORMATION ON THE NEW IPSO FACTO REGIME
If you have any questions regarding the new ipso facto regime and the impact it may have on your business or contractual arrangements, please reach out to one of our Restructuring & Recovery specialists.