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You should get your ipso factos right.

30/07/2018

Commercial contracts generally have clauses allowing termination in the case of breach, or where events occur that flag an problem like imminent insolvency.

Clauses which allow termination in those events, even while essential obligations continue to be performed, are called “ipso facto” clauses.    They allow the other party to exit the contract before it becomes financially exposed.

The Government has made laws to preserve valuable contracts for the purpose of assisting distressed businesses improve their chance of survival.   New restrictions have come into force to preserve opportunities for restructure or sale as a going concern.

The Corporations Act 2001  was amended by the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017  with effect from 1 July 2018.  It only applies to contracts made after 1 July 2018.  It doesn’t apply to companies that were already in liquidation or that were trading insolvently at that date.  It also exempts contracts for financial products, sales of business, debt priority agreements, complex arrangements with sophisticated parties and some other contracts.

The laws go further than simply delaying termination rights.  They also prevent the exercise of other rights triggered by a party’s distressed “financial position”.  For example, they stop a creditor calling on bank guarantees, cash retentions, suspending works or deliveries or stepping in to take over the remaining work.  But they do not affect parent company guarantees, contractual indemnities, set-offs, rights of  assignment, rights of novation and some other contractual arrangements triggered by insolvency events.

Those rights are stayed and become temporarily unenforceable when a company enters into a scheme of arrangement with its creditors or is in receivership or during voluntary administration.

The new law doesn’t mean that ‘ipso facto” rights are obsolete or illegal.  There are many enforcement rights that are exempt from the statutory regime.   The law is complex, so you should take skilled legal advice in drafting your contracts.  And you should act early to protect your position at the first sign sign of trading problems.

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