Legal Feature: Ipso Facto Rights: A Thing of the Past?

By Alan Arnott & Shi Ying Yong, Technology Lawyers @ Arnotts Technology Lawyers

To encourage and facilitate the turnaround and restructuring of financially distressed businesses as part of laws aimed at encouraging entrepreneurship, recent amendments to the Corporations Act 2001 (Cth)(Act) that apply with the passage of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 have placed a stay on the enforcement of ipso facto clauses where a counterparty to an agreement enters voluntary administration, receivership or a scheme of arrangement (Ipso Facto Amendments).

Ipso facto clauses enable a party to exercise certain rights (such as to suspend the performance of a contractual obligation or call upon a bank guarantee) or terminate the contract upon the other party suffering an insolvency event.

For parties entering into contracts on or after 1 July 2018, some ipso facto clauses in contracts are now unenforceable, unless leave of the Court is obtained. The new Ipso Facto Amendments are not retrospective and only relate to agreements entered into after 1 July 2018.

Under Part 5.1 and 5.2 of the Act, in the event that certain specified restructuring or insolvency procedures are proposed or underway, rights and self-executing provisions in a contract, agreement or arrangement will not be enforceable against the counterparty if they arise as a consequence of:

• the counterparty entering into the administration, receivership (or other managing controller appointments) or proposed scheme of arrangement over the whole or substantially whole of its property (section 451E and 434J of the Act)
• a breach of financial covenants (section 415D of the Act);
• a change of control or material adverse effect based on the counterparty’s financial position (section 451E(1) of the Act); and/or
• the counterparty’s existing financial position (section 451E(1)(b) of the Act).

As the objective of the Act is to provide viable but underperforming companies with an opportunity to implement a turnaround strategy when faced with insolvency, the above restrictions do not apply in circumstances of a liquidation. Additionally, a stay under the Ipso Facto Amendments does not prevent a counterparty from enforcing a contractual right due to breach of contractual obligations for non-payment.

It is also important to note that the Ipso Facto Amendments are subject to exclusions for certain categories of contracts and contractual rights. Under section 5.3A.50 of the Corporations Regulations 2001 (Cth) (Regulations), these categories of contracts include contracts, agreements and/or arrangements for business and share sale, for the supply of goods or services to a public hospital or a public health service, for the supply of essential or critical goods or services to, or the carrying out of essential or critical works, for the Commonwealth (which may include the provision of certain software services) and escrow arrangements for the keeping of computer software code.

Excluded categories of rights under the Regulations include certain rights of assignment and novation, step-in rights, enforcement rights and rights to change the priority or order in which amounts are paid, distributed or received.

This article is for general informational purposes only. It is not legal advice nor is it a substitute for legal advice. Readers should seek legal advice on their own particular