A Federal Government regime may affect the operation of insolvency clauses in contracts entered into from 1 July 2018. The types of clauses that may be affected are clauses that allow a party to terminate or change the operation of a contract if another party to that contract becomes insolvent.
Introduced primarily under the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), the regime is commonly described as the ipso facto regime as it addresses clauses generally referred to as ipso facto clauses.
What is an ipso facto clause?
An ipso facto clause is effectively a bankruptcy or insolvency clause whereby a party is permitted to exercise its rights to terminate a contract due to the bankruptcy or insolvency of the other party.
How are insolvency clauses affected?
The ipso facto regime affects the bankruptcy or insolvency clauses in contracts by placing a stay on a party’s right to terminate or change the operation of the contract, unless excepted. That means that any action that can be taken by a party against another party (ie such as the right of one party to terminate the contract in the event of the bankruptcy or insolvency of the other party) would be put on hold, unless an exception applies.
Correspondingly, where a party has the right under a contract to an advance of money or credit from the other party, that party also has a stay on its right to require a new advance of money or credit from the other party.
What types of insolvency events are affected?
The following are examples of the types of insolvency events we have seen in contracts to which the ipso facto regime applies:
- company arrangement – an arrangement between a company and the creditors of that company (for the purpose of avoiding being wound up) that is put in place to determine how the company’s affairs will be dealt with.
- receivership – in the event a controller or manager is appointed in respect of all or part of a company’s assets.
- administration – in the event a company is taken under the management of an appointed administrator.
How long does a stay on an ipso facto clause last?
The stay period commences when:
- company arrangement – an application for a company arrangement is made (or, for a company, being the disclosing entity, an announcement relating to a company arrangement is made);
- receivership – a controller or manager is appointed in relation to a receivership; or
- administration – when a company is placed under administration.
The end of the stay period varies and is not clear. Subject to extensions, the stay on an ipso facto clause may end:
- company arrangement – when the application for company arrangement is withdrawn (or when it is dismissed by a Court), when the company arrangement comes to an end (unless there is a resolution to wind up the company, in which case the stay period ends when the company is wound up) or, if a company (that is a disclosing entity) announces that it will make application for company arrange and does not make that application within three months of the announcement or three months after the announcement.
- receivership – the control or the appointment of a controller and manager of the company’s assets ends; or
- administration – when the administration of the company ends.
The stay period may be extended by order of a Court and may therefore continue indefinitely where, for example, a stay has been lifted because the reason for enforcing the right relates to the company’s financial position before the end of the stay period or before the company’s commencement of company arrangement, administration or receivership.
What are the Exceptions?
The ipso facto regime has excluded a wide range of contracts. The following list of contracts, (amongst others) are excluded from the ipso facto stay provisions:
- arrangements relating to the sale of a business;
- arrangements in relation to the management of financial investments;
- arrangements relating to escrow accounts containing code and/or passwords for the operation of software (for access by the licensee in the event the licensor is subject to an insolvency event);
- agreements, approvals and permits issued by the Commonwealth, a State or Territory, or a local government;
- agreements for the supply of goods or services to a public hospital or health service;
- a contract directly connected with a securities financing transaction; and
- an agreement or arrangement entered into on or after 1 July 2018 but before 1 July 2023 that is a novation or assignment of some or all rights under an agreement, or a variation of an agreement.
Court may order a lift of the stay
A Court may make an order that a stay does not apply to any part of an ipso facto clause or to the whole of ipso facto clause. The Court may also order the lifting of the stay for a company arrangement if the Court is satisfied that the application was not made for the purpose of avoiding the winding up of the company.
For each company arrangement, receivership and administration the Court may order that the stay does not apply if the Court is satisfied that it is appropriate in the interests of justice. How the Court determines what is not in the interests of justice in respect of a company arrangement, receivership or administration is not entirely clear at this time.
What should you do?
You should review your existing contracts and agreements to see whether they are captured by the ipso facto stay provisions or whether they are within an exception. If you intend to rely on an exception, the wording of exceptions is open to interpretation and there has not been any real guidance or decisions from the court at this stage. Given the uncertainty in this area, we recommend you seek advice before taking any action.
The post Key Changes to Insolvency Event Clauses appeared first on Rouse Lawyers.
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