In an attempt to foster a more entrepreneurial culture in Australian business, amendments to the Corporations Act 2001 (Cth) (the Act) to provide “safe harbour” to directors attempting to turn around failing businesses and the unenforceability of ‘ipso facto’ clauses were recently introduced into federal Parliament. This article examines ipso facto clauses and the impacts of the amendment.
Ipso facto (from Latin, meaning “by the fact itself”) clauses allows for a party to terminate a contract or agreement in particular circumstances. Commonly, ipso facto clauses allow a party to terminate a contract when formal insolvency proceedings are instituted, even though a contract has not otherwise been breached.
Central to the criticisms of ipso facto clauses is that when a company is placed into Voluntary Administration, an appointed Administrator may be prevented from restructuring or selling as a going concern, as a result of an ipso facto clause.
For example, ipso facto clauses can also cause significant problems for a business entering a restructure or voluntary administration, even where it is otherwise meeting its contractual obligations. For example, suppliers may refuse to provide a business with goods, despite the business having met its payment obligations. Ipso facto clauses may also discourage a board from resolving to appoint an administrator under s 436 of the Act.
Under the proposed amendments, ipso facto clauses that allow for termination or variation on the basis of an ‘insolvency event’ will be made unenforceable during a company restructure, ensuring that the objectives of the voluntary administration regime currently contained in the Act are effective. The aim of the legislation is to assist ‘viable but financially distressed companies to continue to operate while they restructure their business.’
The amendment will also allow directors to more freely negotiate with creditors about pursuing a restructure, safe in the knowledge that an ipso facto clause will not be triggered by the entry into formal insolvency. It is important to note that the right to terminate for any other reason, including breach for non-performance or non-payment, will be maintained.
The introduction of ipso facto amendments, in conjunction with “safe harbour” legislation, are designed to create an entrepreneurial culture, reduce the stigma of failure and move away from a risk averse attitude that exists around failing businesses. These changes encourage sensible risk taking from directors, and protect companies from creditors seeking to terminate a contract when a company enters administration.
If you require advice or further information in relation to any of the matters discussed in this article, please contact our Litigation & Dispute Resolution team on 03 5273 5221.