Recent changes to the Corporations Legislation have brought in new conditions in relation to ‘ipso facto’ clauses and how they apply in situations of financial difficulty moving forward.
So what is actually an ‘ipso facto’ clause? It is first crucial to determine what may actually constitute an ‘ipso facto’ clause. These are clauses that are in most standard contracts between corporate entities and are designed to restrict the parties from exercising their rights purely based on some specific event, for example it allows a client to cancel their purchase where a company goes into liquidation, or the like.
Some standard types of ‘ipso facto’ clauses that may form part of common current contracts are likely to include the ability to: –
• discontinue works,
• terminate the contract,
• pursue guarantors,
• apply set off claims,
• take steps to mitigate any losses, or
• call up a bank guarantee.
Now, with the changes to the legislation, where a company that enters into an Voluntary Administration, Receivership, or a Scheme of Arrangement it means that any such ‘ipso facto’ clauses in the contract that become enforceable purely because of the insolvency event would no longer be able to be enforced, and effectively a stay on these clauses would exist.
The period of the stay will start when one of these events occurs, firstly, the company enters into external administration, or secondly the company makes an application for compromise, or finally a managing controller is appointed.
The provisions do not terminate the clause unilaterally. Thus the period of the stay will finish when:
1. the external administration ends, unless it ends because the company is being Wound Up, in which case it will remain in place until the end when it is fully wound up;
2. the application of compromise is withdrawn or dismissed (or if the company becomes fully wound up); or
3. the Managing Controller’s control ends.
It should be noted that the new laws as drafted include some troubling and concerning areas for the ordinary business. These issues include that the ‘ipso facto’ regime includes clauses in contracts that are contrary to the regime, viz ones that are designed to bring in some form of ‘ipso facto’ like clause subsequently would also be caught by the new legislation.
Despite the above, there may well exist other alternatives under the contract with which the contract can be terminated, for example, the failure of some other obligation under the contract. A further alternative may well be available in that the external party can engage with the relevant external administrator and seek to have the relevant terms enforced with the consent of all parties.
It should be noted that this regime will only apply to contracts that are entered into after the date on which the regime starts, which is expected to be 1 July 2018. So one major point is that as much as possible should be clearly documented before then.
So if you are preparing a contract with this in mind, you will need to consider these new changes. We are happy to provide guidance should you require clarification of your available commercial options.