Draft ipso facto regulations – for consultation

The final piece of the ipso facto reform is almost in place, following today’s release of a draft-for-consultation version of the regulations.

Ipso facto clauses (also known as ‘termination for insolvency’ clauses, and discussed in more detail here) allow termination of a contract if a party to the contract becomes insolvent – even if there is no other default.

Such clauses can be immensely damaging to businesses that enter formal insolvency administration because essential assets and services can be unilaterally withdrawn: landlords can lock out insolvent tenants, franchisors can withdraw access to franchise systems, and lessors can repossess leased equipment.

It’s true that voluntary administration will ‘stay’ such action – but the effect is only temporary.  The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill passed in September 2017 creates a permanent stay – albeit only for clauses in contracts entered into on or after 30 June 2018.

It was always intended that final detail – a list of exemptions – would be left to the regulations (now available here).  The most notable aspects are:

• The ipso facto stay will not apply to derivatives, margin lending facilities, and invoice finance arrangements.  This is sensible, and as expected.
• The draft regulations propose an exemption for ‘a contract, agreement or arrangement of which a special purpose vehicle is a party.’  This will be under careful scrutiny: it can’t be intended that the ipso facto stay can be defeated by simply adding an SPV entity to any contractual arrangement.
• The stay will not affect contractual rights to combine, set off, or net out, multiple accounts.  Again, this is sensible and expected.
• As anticipated, there is a specific protection of a secured creditor’s ability to appoint a controller, and step-in rights are likewise protected.

The most significant deficiency in the ipso facto reforms – that the stay will not apply to contracts entered into before 30 June 2018 even if they are modified after that date – remains unaddressed.

Submissions on the proposals may be made until 11 May 2018.

(For those who noticed the photo: I haven’t tried Ipso Facto wines but the Cabernet gets great reviews!)