Business owners to urgently consider the "ipso facto" factor
New legislation that puts a stay on so-called Ipso Facto clauses in contracts became effective on July 1, 2018.
Ipso facto means “by that very fact or act”, and such clauses, common in commercial contracts, have meant traditionally that a party could cancel or otherwise modify a contract when the other party to the contract has become involved in an insolvency event.
But from the start of the financial year 2018-19 when the Treasury Laws Amendment (Enterprise Incentives No 2) Bill 2017 went into effect, immediate modifications of contracts in these circumstances was prevented, and financially troubled businesses were given breathing space to fix their problems.
Effects of the new law
As part of Australia’s National Innovation and Science Agenda, the Bill is the second piece of legislation to encourage salvation of businesses rather than, as in the past, have them condemned out of hand by a contract’s ipso facto clause.
The first part of the legislation, which became operative on 19 September 2017, provides a so-called “safe harbour” for directors facing personal liability for alleged insolvent trading – see March 2018 article headed New legislation offers incentives to directors in financial difficulty at http://macksadvisory.com.au/
Previously the law has tended to discourage entrepreneurs in start-up companies from taking on risks inherent in innovation, thus in effect putting a brake on vital expansion of the national economy.
Furthermore, by enabling parties to exercise their right of cancellation because of the insolvency of another party to a contract, previous law also tended to destroy the viability and value of the insolvent company’s business and its assets. Clearly this disadvantaged creditors when an insolvency practitioner was attempting to realise a business’s maximum worth for them.
Now, the reformed law, in staying the destructive effect of ipso facto clauses, gives a financially stressed business in a contract time to return to solvency, or if insolvency is looming, provides opportunity for restructuring and turning the business around towards profit.
The effects in perspective
However, your perspective would vary were your business in a contract made before July this year as a supplier to a company that may subsequently go into administration.
You should be aware that because ipso facto provisions are being grandfathered and the new legislation will affect only those contracts entered into from the start of the 2018-19 financial year, many contracts, even though they may be of similar types in the same industry, could be operating under different regimes.
It is for this reason Macks Advisory believes parties to contracts should urgently consider getting advice on amending existing contracts rather than spending time, effort and money drawing up new ones.
If they haven’t already done so we urge business owners to consult their solicitors without delay about any contracts to which they are a party.
