From 1 July 2018 the ipso facto law reform has now come into force. Along with the new Safe Harbour legislation previously discussed in our newsletter, it forms part of the Federal Government’s insolvency law reform package. This means that business-to-business contracts will become much more complex if an insolvency action arises.
Up to now, if a counterparty became insolvent contract principals would exercise their ipso facto rights under the contract to protect their position by either suspending works, terminating the contract, calling upon bank guarantees, or raising set-off claims.
These new laws, however, mean that once an administrator or receiver is appointed over substantial assets, or a scheme of arrangement made to avoid winding-up is proposed, the above ipso facto rights will be unenforceable against the counterparty if they are raised by a principal for any of the following reasons:
- The administration, receivership, or proposed scheme of arrangement of the counterparty;
- The credit rating of the counterparty;
- A change of control or material adverse effect on the counterparty’s financial position; or
- Termination by court order for convenience, based on the counterparty’s position.
Therefore, it is crucial for business owners or contract principals to review the security, insolvency, breach, termination, and set-off provisions of their contracts.
However, bear in mind that these new laws are not retrospective and will only apply to contracts entered into after 1 July 2018.
For any further questions, or to conduct a review of your services contracts or agreements to bring them into line with the new legal regime and protect your business position, please contact us at email@example.com.