Recent changes to the Corporations Act 2001 establishes a regime that prevents creditors from exercising certain termination rights. These changes are effective from 1st July 2018.
Generally contractual clauses which allow a party to terminate a contract with a contractor or service provider (sometimes called “ipso facto” clauses) on the basis that the contractor or service provider has entered into a form of insolvency administration, are no longer enforceable.
An insolvency event is defined to include where a company:
enters into voluntary administration; or
is subject to any scheme of arrangements with its creditors; or
has a receiver or receiver and manager appointed to any part of the property.
A party will nevertheless be entitled to terminate the contract for reasons such as non-performance. However, leaving termination for non-performance until after the commencement of external administration may give rise to difficulties in showing that the proper cause is the non-performance rather than the entering into the insolvency event.
The holder of the termination right may apply to the Court seeking an order that:
the stay on enforcing the contractual termination rights ought not apply if such an order is in the interests of justice;
alternatively, the Court may order that other specific rights are still enforceable.
There is no contracting out of the amendments.
The amendments are part of the Federal Government’s push to enhance entrepreneurship in Australia and to help preserve the adverse economic outcomes that can result from the immediate liquidation of a business.
Ipso facto clauses are enforceable if the contractor/service provider enters liquidation (Court or creditors voluntary) arising from its insolvency.