Ipso-Facto
From 1 July 2018, a party to a contract no longer has an automatic right to terminate a contract if the other party suffers an insolvency event (“Ipso-Facto”). An “insolvency event” may include voluntary administration, say, where a company chooses to wind up voluntarily.
The focus of legislation in this area has shifted. The emphasis is now more on restructuring companies and maintaining contractual relationships which allow a company facing insolvency to continue to trade through to recovery rather than being forced to wind up.
These rights do not apply retrospectively and only apply to contracts entered into from 1 July 2018.
Increased risk: What you need to be aware of
Historically (and subject to specific terms negotiated between the parties), contracts in trade and commerce have generally included terms allowing a party to terminate a contract if the other party suffers an insolvency event regardless of whether the other party is able to continue their obligations under the contract.
With the introduction of the Ipso-Facto changes, the right of a party to rely on a contractual right to terminate that contract is restricted. These changes impose a temporary stay on enforcing such termination provisions in the contract. This stay on enforcement ends when the period of voluntary administration ends or when the company is wound up.
Anti-avoidance provisions were also introduced which require a party to obtain permission of a court to exercise certain rights under the contract that are inconsistent with the Ipso-Facto rules. For example, exercising a right to call on a guarantee or taking possession of a security asset.
The Ipso-Facto rules will not impact a situation where a party cannot pay its debts as and when they fall due. If a party is unable to perform under a contract, the other party is permitted to terminate for non-performance of the contract.
Exceptions
The Ipso-Facto rules do not apply to the sale of a business (including a sale of securities or financial products) and do not apply to renewals or variations of contracts which were entered into before 1 July 2018.
Our Corporate lawyers can assist with any challenges you may face in regard to insolvency so if you are concerned about your current position or that of a colleague or business partner please contact us today on +61 3 9822 8588 or email HERE to find out how we can help you.
