New ipso facto regime has commenced

10 August, 2018

The amendments to the insolvency regime in the Corporations Act 2001 (Cwlth) to restrict the rights of parties to enforce ipso facto clauses in new contracts came into effect on 1 July 2018.

These clauses typically allow a party to terminate or exercise other contractual rights if the counterparty enters into an insolvency. Under the new regime, the enforcement of such contractual rights is stayed where the relevant agreement or arrangement was entered into on or after 1 July 2018. The duration of the stay period is set out in the legislation and a party seeking to rely on an ipso facto clause can apply to the court to lift the stay.

The regime has broad application but certain types of contracts and rights have been carved out. These exceptions have changed slightly since exposure drafts of the instruments were released earlier this year and are contained in the following instruments.

Until 1 July 2023, contracts resulting from novation, assignment or variation of pre-1 July 2018 contracts are excluded from the regime under grandfathering provisions. Practitioners should advise clients on these provisions where appropriate.

According to the Explanatory Memorandum to the amending legislation a counterparty still has the right to terminate or amend an agreement for reasons other than an insolvency event, such as non-payment or non-performance. These clauses should be clearly written to avoid any ambiguity.

Practitioners should review their precedent documents and consider the potential enforceability of contractual rights in light of the changes. Any attempt to exercise an unenforceable right to terminate could result in liability for wrongful repudiation of the contract.