07 November 2018
An ipso facto clause creates a contractual right upon the occurrence of a specific event. For contracts entered into after 1 July 2018, the ability of a contract counterparty to rely on so called ‘ipso facto clauses’ triggered by the occurrence of an insolvency event is limited.
The purpose of the new laws is to ‘allow breathing space for a company to continue to trade during a formal restructure and recover from an insolvency event.’
The changes to the Corporation Act 2001 (Cth) impose a mandatory stay (i.e. suspension) on a party’s ability to exercise termination, suspension and other contractual rights that arise due to its counterparty experiencing one of the following insolvency events:
The stay will continue to operate until the contracting party is no longer under external administration or arrangement (either due to the company voting on a deed of company arrangement allowing continued trading or the company is wound up – i.e. liquidation) or until such further time as the court may determine is in the interests of justice.
It is common for construction, supply, operation and maintenance and service agreements to contain the following ipso facto clauses:
1. Right to terminate for insolvency
It is typical that an agreement allows for a party to terminate an agreement where an insolvency event occurs in respect of the other party. Where the counterparty is the contractor, the agreement may also allow the principal to take the works out of the contractor’s hands to be completed by either itself or a third party (with costs incurred being a debt due and payable by the contractor).
2. Right to call on security
The purpose of security is to guarantee the performance of the contractor’s obligations under an agreement. It is common for an agreement to allow a principal to call upon security in circumstances of non-performance including termination due to the insolvency of the contractor.
3. Right to suspend performance
In circumstances where a contractor suffers an insolvency event, an agreement will usually allow for the counterparty (for example, a subcontractor) to suspend performance of the works. The benefit of this suspension right is that the subcontractor avoids incurring a further payment cycle’s worth of debt in circumstances where there is uncertainty that outstanding debt will be paid.
There are certain agreements where ipso facto clauses are not subject to the mandatory stay provisions. The key ones relevant to government are:
Rights that are excluded from the operation of the mandatory stay provisions (even where the contract itself has not been excluded under the Regulation):
Anti-avoidance provisions mean contractual clauses that (in substance) attempt to circumvent the operation of the amendments are of no effect.
There are many Government contracts that are not covered by the above exclusions, and which will therefore be subject to the ipso facto ‘stay provisions’, including:
Importantly, these new laws will not affect other contractual rights that are not triggered by the occurrence of an insolvency event, including termination for convenience.
 Corporations Act 2001 (Cth) amended by the Treasury Laws Amendments (2017 Enterprise Incentive No. 2) Act 2017 (Cth) (Act).
 Explanatory Memorandum, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, 26, 2.10.
 Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 (Cth).
 Corporations (Stay on Enforcing Certain Rights) Declaration 2018 (Cth).
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.