An “ipso facto” clause is essentially a clause in a commercial contract which allows a party to enforce a right, or terminate or amend a contract, where the other party experiences an insolvency event such as having an administrator appointed.
Clauses of this nature are commonly found in commercial contracts including commercial leases.
Under the new laws (which apply to contracts entered into after 1 July 2018), there is an automatic stay on the enforcement of ipso facto clauses where:
- a company enters into a scheme of arrangement (or announces it will enter into a scheme of arrangement) to avoid being wound up in insolvency
- a managing controller or receiver is appointed over all or substantially all of the company’s assets
- a company goes into administration
Consequently, a party cannot terminate a contract due solely to any of the above reasons and must continue to supply goods and services to the financially distressed company (provided the company continues to perform its obligations and is not otherwise in breach of contract).
However, the new rules do not require a party to continue providing credit to a financially distressed company, and any stay of enforcement of an ipso facto clause will cease if the company is placed into liquidation.
In addition, a party can terminate a contract on the basis of an ipso facto clause if it obtains the written consent of the administrator, receiver or scheme administrator, or if it terminates pursuant to a court order.
Every business should carefully review their commercial contracts to ensure they have other grounds for termination and not just due to the circumstances set out in an “ipso facto” clause.
