The Bulletin August 2018

DEBT
Ipso facto regime ends
termination rights on
insolvency events
JARRAD NAPIER, LAWYER, DW FOX TUCKER AND VASILIOS MARINOS,
SENIOR ASSOCIATE, DW FOX TUCKER
Ipso facto means by the fact itself; by
that very fact. 1 However, for insolvency
practitioners it is often considered in the
context of a contractual agreement or
arrangement where termination is triggered
upon an insolvency event. Therefore,
by the very fact of an insolvency event
of a company, a contracting party may
modify or terminate an existing agreement.
This was the status of most contractual
agreements or arrangements prior to 1 July,
2018.
Prior to 1 July, 2018, corporate creditors
and contracting parties were able to rely
on ipso facto clauses expressly contained
in their corporate contracts to terminate
or modify their agreement or arrangement
with the company upon the appointment
of an external administrator or other
scheme of arrangement. In other words,
supply contracts, contracts for services
and other arrangements were able to
be terminated in the face of a company
entering formal administration, often
leaving no alternative for the administrator
but to place the company into liquidation.
On 1 July, 2018, new provisions in the
Corporations Act 2001 (Cth) 2 (the Act) came
into effect that will operate to stay the
exercise of certain contractual rights: to
either terminate; or modify a company’s
agreement upon a company entering
insolvency related events or restructuring
schemes of arrangement. Australia’s new
regime will only affect contracts entered
18 THE BULLETIN August 2018
into on or after 1 July, 2018, however, as
always, with some exceptions.
WHAT IS THE PURPOSE OF THE IPSO
FACTO REGIME?
When a company appoints an
administrator, it is seldom that the
company is able to continue to trade as
it had done prior to the administration.
In most cases and by no fault of the
administrator, the company is placed
into liquidation. As described in the
Explanatory Statement to the Act and the
Corporations Amendment (Stay on Enforcing
Certain Rights) Regulations 2018 (Cth) (the
Amending Regulations):
“… the operation of ipso facto clauses can
reduce the scope for a successful restructure,
destroy the enterprise value of a business
entering formal administration, or prevent the
sale of the business as a going concern.”
Therefore, a stay on the enforcement
of the ipso facto clauses will hopefully
encourage the goodwill in a company’s
pre-existing contractual arrangements,
in circumstances where the company’s
operators genuinely want to restructure
and return to normal trading. This article
does not consider the criticisms that
ipso facto clauses may trigger, namely, a
company’s discontent in dealing with an
entity (for example, an administrator or
appointed receivers and managers), which
“… the operation of ipso facto clauses can reduce
the scope for a successful restructure, destroy the
enterprise value of a business entering formal
administration, or prevent the sale of the business
as a going concern.”
they never consented to dealing with. It
may also be worthwhile considering how
a contracting party can protect its own
bargaining strength when dealing with an
administrator or company in receivership.
Nonetheless, the operation of an ipso
facto stay may increase a company’s
chances to undergo a formal restructure
and instil certainty in investors to invest in
or purchase that business.
Whilst there may be a stay on the
enforcement of ipso facto clauses, it is
not Parliament’s intention to restrict a
contracting party from enforcing other
rights of termination, such as nonpayment
pursuant to the terms of the
contract or non-performance. 3
HOW WILL THE NEW IPSO FACTO REGIME
WORK?
The Treasury Laws Amendment (2017
Enterprise Incentives No. 2) Act 2017 (the
Amending Act) inserted provisions into
the Act where the ipso facto regime is
to apply to the following circumstances
where a company:
• enters a scheme of arrangement; or
• appoints a managing controller or
receiver over the company’s property
(either all or a substantial part of it); or
• has come under voluntary administration.
Explicitly, the ipso facto regime will not
be triggered in circumstances where a
company:
• has a receiver appointed or other
managing controllers not over all or a
substantial part of company’s property;
or
• enters into deeds of company
arrangement; or
• liquidations that do not immediately
follow an administration or other
scheme of arrangement.