The new ipso facto regime commenced on 1 July 2018 and applies to a variety of contracts in respect of insolvent companies. Establishing which of your business contracts may be affected by the ipso facto reforms can be complex.

The ipso facto reforms change the traditional contracting rights available to a party against a company that may be experiencing certain insolvency events. The changes seek to assist viable but financially distressed companies to continue to operate while they undergo the required restructuring.

Most recently and importantly, a new ‘Declaration’ has been released which preserves some contractual rights.

What is an ipso facto clause?

Ipso facto clauses are common clauses in commercial contracts. The clause entitles a party to terminate or modify the operation of a contract upon the occurrence of certain insolvency or other events, regardless of whether that party has performed its obligations under the contract. Some clauses can be self-executing and others require a party to trigger them.

A common example might involve giving a wholesale supplier the right to terminate a supply contract where the retailer customer goes into administration or perhaps has a winding up application commenced against them.

Ipso facto clauses and insolvency events

From 1 July 2018, there is a stay on the exercising of certain ipso facto rights if the counterparty has commenced one of the three types of external administration:

• schemes of arrangement;
• receivership over whole or substantially whole of the company’s property; or
• voluntary administration.

In certain situations, the stay can become indefinite and a party may not exercise its ipso facto rights. Therefore, the timing of the stay is critical and will vary depending on the insolvency event. The courts have broad powers to lift the stay or make changes to timing where it would be in the best interests of justice.

There are also some exceptions where the stay will not apply, and in particular, the stay usually won’t have any force if the relevant contract was entered into by the parties prior to 1 July 2018.

How can we help?

We can assist you by:

• determining whether the new rules apply to your contracts;
• providing strategic and legal advice on whether to update your contracts to include or exclude ipso facto clauses;
• providing legal advice to enforce your rights;
• ensuring that your internal contracting procedures comply with the new reforms; and
• minimising the risk of breaching the rules and contractual disputes occurring.