You may have read that insolvency law reforms were passed in 2017 and the effect (and commencement of specific regulations) were implemented over two stages last year (1 March and 1 September 2017). They may be relevant to contracts entered into, whether as supplier or buyer or service deliverer or user and touch upon “ipso facto” termination provisions.

As part of the reform, safe harbour provisions came into force in September 2017 providing a mechanism for directors to continue to operate an insolvent (or suspected insolvent) company, as long as these directors are taking a course of action reasonably likely to lead to a ‘better outcome’. (I refrain, in this short post, from commenting on the scope/definition/interpretation of the ‘better outcome’ test).

I draw your attention to the new ipso facto provisions in the Corporations Act 2001 (as amended by the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017) which will be effective on and from 1 July 2018, as these ipso facto provisions will apply to all contracts, agreements, arrangements etc entered into on or after that date.

Many of standard form contracts / contract precedents involving individuals and companies may require amendment to reflect the new regulations (once these regulations have been declared (currently in draft) and it is suggested that consideration be given to amending existing contracts to bring them within the reform.

Briefly (and again without commenting on how effective the new provisions will be in practice), the effect of the ipso facto [formerly ‘drop dead’] stay provisions will limit the options of a party to enforce a right, and terminate or amend a contract, when a company has entered into a formal insolvency regardless of the other party’s continued performance of its obligations under the contract.

The carve-outs/exemptions to the application of the stay have not yet been confirmed by the Government and the forum for comments in relation to the draft regulations just closed on 11 May 2018, as such there may be further changes to the draft currently available https://treasury.gov.au/consultation/c2018-t280567/.

For that reason, there has been some suggestion (and it may be useful to readers using standard form contracts) that current clauses allowing for termination rights on insolvency be left as they are and an additional clause be inserted to include words to the effect of:

“The termination rights contained in clauses ### are subject to the operation of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 and its associated regulations”, at least, until such time that the full effect of the new ipso facto provisions are known.

I acknowledge the contribution of Debbie Tran, Eakin McCaffery Cox, to the preparation of this post.