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The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 was introduced on 28 March 2017. If passed, the Bill will reform the Corporations Act 2001 and Australia’s insolvency laws. These changes will have particular impact on “ipso facto” clauses in contracts

What is an ipso facto clause?

Ipso facto clauses are those that allow contracts to be terminated solely due to an insolvency event. This means that a company which may otherwise be able to trade out of insolvency can have important contracts terminated. The termination of these contracts could effectively eliminate any chance the company had to survive.

On the flip side, creditors of a company can be benefitted by an ipso facto clause. A creditor may rely on such a clause to cease supplying to a company in financial peril.  This could minimise that creditor’s exposure to irrecoverable debt should a company ultimately be wound up.

What are the proposed changes.

The Bill introduces the following provisions regarding ipso facto clauses:

  • under s415D, any contractual right which is triggered merely because the company enters into or seeks to enter into a scheme of arrangement is unenforceable whilst the company is the subject of the scheme proposal, provided the scheme is proposed in order to avoid being wound up in insolvency; and
  • under s451E, any contractual right which is triggered merely because the company is under administration is enforceable whilst the company is in administration.

Certain rights are likely to be excluded from the stay and the government is currently  seeking feedback on the appropriateness of the proposed exclusions.

Why is the government changing the law?

The Australian Government argues that the proposed reforms will allow for a ‘safe harbour’ for company directors who are undertaking a restructure by protecting them from personal liability for insolvent trading in certain circumstances. The Government’s goal is for these amendments to help drive business growth, local jobs and global success.

As described by Minister O’Dwyer, the aim of this Bill is to encourage company directors to implement a business rescue plan early, to keep control of the company while the plan is executed and to take reasonable risks to facilitate the company’s recovery.

We will continue to update you on the progress of these amendments.