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Automatic rights to terminate for insolvency and new legislation - the end of ‘ipso facto’ clauses?

The Federal Government is set to bring in reforms to assist struggling businesses from going under and closing their doors. The new controls come into effect from 1 July 2018 and could signify the end of ‘ipso facto’ clauses.

What are ‘ipso facto’ clauses?

Commonly found in contracts across all industries, ‘ipso facto’ clauses allow a contracting party to modify, suspend or terminate their contract with another party when a certain event arises, such as insolvency. Unfortunately for businesses, these rights are often exercised despite the company’s ability to continue performing their obligations under the contract. The termination of these contracts can be the death knell for a business that might otherwise be capable of a turnaround.

What is changing?

The proposed reforms, passed in September 2017 under the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) (Amendment Act), will mean that contracting parties will no longer be able to end or suspend contracts if the right to do so is only triggered as a result of insolvency events. Under the Amendment Act, these types of rights may be deemed temporarily unenforceable or stayed (put on hold) for a period of time. Businesses may also apply for an extension of this period.

Why is this important?

The operation of ‘ipso facto’ clauses have often meant that businesses lose some of their biggest and most lucrative contracts in a time where they become most crucial. The rationale for the changes is that if contracting parties can be restrained from terminating or modifying their contracts prematurely, businesses will be better equipped to meet their obligations and survive a turnaround or restructure.

The Federal Government hopes that the breathing space these new provisions create will mean that more businesses will be able to better weather the storm – but will they be prove to be unfairly restrictive on parties wishing to terminate their agreements? We will just have to wait and see come 1 July 2018.

These restrictions will only apply to contracts entered into after 1 July 2018. Talk to us if you are interested in a more detailed overview of the changes and how they might impact your future contracts.

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