Termination of contracts on appointment of administrators
It is common practice for company contracts to contain clauses, known as “ipso facto” clauses, which terminate or amend the contract (e.g. by accelerating payments) merely because a company has entered into a formal insolvency process.
The operation of ipso facto clauses can reduce the scope for a company to effect a successful restructure, destroy the value of a business entering into formal administration, or prevent the sale of the business as a going concern. These outcomes can reduce or eliminate returns in liquidation because they disrupt the businesses’ contractual arrangements and destroy goodwill, potentially prejudicing other creditors and defeating the purpose of voluntary administration.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has released draft legislation, the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Bill 2017, that introduces provisions to the Corporations Act 2001 (Cth) that relate to ipso facto clauses triggered by administration . The proposed amendments to the Corporations Act 2001 (Cth) will make ipso facto clauses unenforceable by imposing a stay on enforcement.
Under the proposed new s 451E, any contractual right which is triggered merely because the company is under administration is unenforceable whilst the company is in administration (subject to any court extension to the stay). The proposed stay on enforcement of the ipso facto clauses is consistent with the intentions behind the moratoriums placed on the enforcement of third parties’ rights that apply when a company enters into administration (pursuant to s 440B of the Corporations Act 2001 (Cth)).
Making these clauses unenforceable will give companies a better opportunity to effectively restructure and may increase the likelihood of being able to sell the business as a going concern. As noted in the explanatory memorandum accompanying the draft legislation, the aim of the amendments is to allow breathing space for a company to continue to trade while in external administration aimed at avoiding the liquidation of a company.
It is proposed that there will also be certain types of contracts and contractual rights which are expected to be excluded by the prohibition on the operation of ipso facto clauses and the Courts will have discretion to allow a right to be enforced if doing so would be appropriate in the interests of justice.
If the draft legislation is passed, the stay on the operation of ipso facto clauses will become effective on the later of 1 January 2018 or the day after Royal Assent.
For more information or discussion, please contact HopgoodGanim Lawyers’ Dispute Resolution team.
 It is noted that there are similar provisions proposed by the draft legislation that relate to ipso facto clauses triggered by a company entering into schemes of arrangement.