Ipso Facto Clauses: What You Should Be Aware Of Before Entering Into a Contract
In 2018, the new ipso facto regime was introduced in Australia and now applies to any contracts entered into since its introduction.
Many people are unaware that ipso facto clauses are standard terms in their commercial contracts.
What Are Ipso Facto Clauses?
Ipso facto clauses are also known as termination clauses which create a contractual right whereby one party can elect to terminate or modify the contract upon the occurrence of an insolvency-related trigger event.
The trigger event is often where an administrator, liquidator, receiver, or controller is appointed.
It has been debated over many years that the operation of ipso facto clauses can deprive a company of any prospect of economic recovery and can be viewed as inconsistent with the main objective of entering into voluntary administration.
The New Regime
Under the new regime, a party’s right to terminate or amend the contract, under the ipso facto clause, is ‘stayed’ for a specific period of time.
The new regime only applies to contracts entered into after July 2018.
Any contracts entered into before July 2018 that contain ipso facto clauses (insolvency-related termination clauses) are still enforceable.
However, it should be noted that the new regime does not prevent the parties from terminating the contract in other circumstances, for example, a breach of contract for non-payment of rent.
The other party still remains liable under the contract.
The courts have the power, under the Corporations Act 2001 (Cth) to override the stay, if it is in the interest of justice to do so.
Length of Stay
The length of the stay is dependent upon the type of insolvency event.
The stay begins when the company elects to enter into administration and appoints an administrator and ends when the administration has concluded because the company has been wound up.
The purpose of this stay is to assist in the restoration of the troubled company and enables it to continue trading.
Receivership/Appointment of Managing Controller
The stay begins when the receiver/managing controller is appointed and ends when their control over the company’s property is no longer required.
The purpose of this stay is to allow the company time to restructure if required.
Compromise or Scheme of Arrangement
The stay begins when the company publicly announces the scheme proposal or when a scheme application is made and ends three months after the announcement, when the application is unsuccessful or dismissed or when the company is wound up.
The purpose of this stay is also to allow the company time to restructure.
Things to Consider
In light of the new regime, you ought to ensure that you conduct comprehensive reviews of your existing contracts entered into after July 2018 and have a clear understanding of the impact of ipso facto clauses.
If you continue to include ipso facto clauses in your new contracts, you must be careful when issuing a termination notice on the other party, if the termination is passed on an insolvency-related trigger event.
In some circumstances, this may be viewed as a repudiation of the contract and the other party may be entitled to sue you for damages.
Before entering into a contract, you should also consider ipso facto clauses at the beginning of each transaction you enter into and conduct adequate due diligence on any party to the transaction concerning its financial position, and ensuring appropriate Personal Property Securities Act 2009 (Cth) registrations are in place, if applicable.
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