The ipso facto reforms, which are expected to come into effect on 1 January 2018, are likely to have a substantial impact on the way in which businesses manage their insolvency risk.

Insolvency risk is the risk that the party you are transacting with goes insolvent and is unable to pay the debts that are owed to you. A common way in which businesses have sought to minimise their insolvency risk is to draft their agreements so that they have the right to terminate the agreement if the other party shows evidence of insolvency such as the appointment of an administrator. ipso facto insolvency reforms

The ipso facto reforms are designed to make clauses containing such rights unenforceable against the insolvent company.

The reforms will come into effect through the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) which introduces a number of new provisions into the Corporations Act 2001 (Cth).

In broad terms, the new provisions make rights in contracts, agreements or arrangements unenforceable if the right arises because the other company:

  • has entered into a scheme of arrangement; or
  • has appointed a managing controller; or
  • is under administration.

The new provisions also deal with “self-executing provisions” which are provisions in contracts, agreements and arrangements that start to apply immediately without any parties making a decision to exercise a right. Such provisions are also unenforceable to the extent that they arise because of the above reasons.

These reforms mean that businesses will need to find a new way of minimising insolvency risk, which may include identifying indicators of insolvency well before the company on the other side enters into one of the more formal insolvency processes.

Contracts or agreements entered into after these reforms come into effect will also need to be drafted in a way that preserves the enforceability of any rights against potentially insolvent parties.

If your business is concerned about preserving the enforceability of your rights and managing insolvency risk in the wake of these reforms, Lewis Holdway Lawyers can help. The lawyers in our Business practice group can give you advice and review or draft your contracts and agreements to reflect the changes brought about by the reforms.