An ipso facto clause creates a contractual right upon the occurrence of a specific event. For contracts entered into after 1 July 2018, the ability of a contract counterparty to rely on so called ‘ipso facto clauses’ triggered by the occurrence of an insolvency event is limited.
The purpose of the new laws is to ‘allow breathing space for a company to continue to trade during a formal restructure and recover from an insolvency event.’
Insolvency events which trigger the ‘stay provisions’
The changes to the Corporation Act 2001 (Cth) impose a mandatory stay (i.e. suspension) on a party’s ability to exercise termination, suspension and other contractual rights that arise due to its counterparty experiencing one of the following insolvency events:
- the company enters voluntary administration;
- a scheme of arrangement is made in relation to the company; or
- a managing controller is appointed over all or substantially all of the company’s assets.
How long will the stay apply for?
The stay will continue to operate until the contracting party is no longer under external administration or arrangement (either due to the company voting on a deed of company arrangement allowing continued trading or the company is wound up – i.e. liquidation) or until such further time as the court may determine is in the interests of justice.
What typical clauses would be subject to the stay?
It is common for construction, supply, operation and maintenance and service agreements to contain the following ipso facto clauses:
1. Right to terminate for insolvency
It is typical that an agreement allows for a party to terminate an agreement where an insolvency event occurs in respect of the other party. Where the counterparty is the contractor, the agreement may also allow the principal to take the works out of the contractor’s hands to be completed by either itself or a third party (with costs incurred being a debt due and payable by the contractor).
2. Right to call on security
The purpose of security is to guarantee the performance of the contractor’s obligations under an agreement. It is common for an agreement to allow a principal to call upon security in circumstances of non-performance including termination due to the insolvency of the contractor.
3. Right to suspend performance
In circumstances where a contractor suffers an insolvency event, an agreement will usually allow for the counterparty (for example, a subcontractor) to suspend performance of the works. The benefit of this suspension right is that the subcontractor avoids incurring a further payment cycle’s worth of debt in circumstances where there is uncertainty that outstanding debt will be paid.
What agreements are excluded from the stay provisions?
There are certain agreements where ipso facto clauses are not subject to the mandatory stay provisions. The key ones relevant to government are:
- Public-private partnership (PPP) contracts – an agreement that involves a special purpose vehicle (SPV) and provides for a PPP (an undefined term under the Regulation).
- Project finance – a financial arrangement that involves an SPV in which the finance is to be repaid primarily from project cash flow and all or substantially all of the project’s assets are held as security for that finance.
- Health – an agreement for the supply of goods or services to, or on behalf of, a public hospital or public health service.
- Building contracts over $1 billion – an agreement for the provisions of building or construction work and any related goods and services with total payments of at least $1 billion. This exception applies until 30 June 2023.
- Essential or critical goods/services – an agreement for the supply of goods or services that are ‘essential’ or ‘critical’ to the Government, a Government authority or the public on behalf of the Government.
- Defence – an agreement related to Australia’s national security, boarder protection or defence capability.
- Novation, assignment or variation of an agreement entered prior to 1 July 2018 – an agreement that was entered into or renewed after 1 July 2018 as a result of the novation, assignment or variation of a right that existed prior to 1 July 2018. This exception applies until 30 June 2023.
- Licences, permits and approvals – a licence, permit or approval issued by either a Government or Government authority.
What types of rights are excluded from the stay provisions?
Rights that are excluded from the operation of the mandatory stay provisions (even where the contract itself has not been excluded under the Regulation):
- Set-off – a right of set-off or combination of accounts, or net balances or other amounts.
- Step-in – a right to perform the obligations or enforce rights under the primary contract on behalf of a company (either by the principal or a third party).
- Charge default interest – a right to charge default interest under a financing arrangement, guarantee or related security.
- Appoint a controller – a right of an ‘all-assets secured creditor’ to appoint a receiver or controller to an asset, regardless of whether a controller has already been appointed.
- Accelerate – a right to vary the date for payment, however only to the extent that it is necessary to enforce a right of set-off.
Anti-avoidance provisions mean contractual clauses that (in substance) attempt to circumvent the operation of the amendments are of no effect.
There are many Government contracts that are not covered by the above exclusions, and which will therefore be subject to the ipso facto ‘stay provisions’, including:
- an agreement for lease;
- an agreement for the delivery of infrastructure projects that are not by way of a PPP vehicle;
- an agreement for Government construction projects where the total payments are less than $1 billion; or
- an agreement for the supply of goods or services to or on behalf of the Government or a Government authority that are not essential or critical services.
Importantly, these new laws will not affect other contractual rights that are not triggered by the occurrence of an insolvency event, including termination for convenience.