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Are you still protected? Changes to the law impact on termination rights

Motor dealers

 Recent changes to the law mean you may no longer be able to rely on contractual entitlements to immediately call on security or terminate agreements with trading partners or parts suppliers who encounter financial strife or have administrators or liquidators appointed.  We recommend reviewing your trading documents to confirm whether or not you are affected by these recent changes, and to strengthen your trading terms where available to maximise your protection.

Distributors and Manufacturers, know your rights!

Recent changes to the law mean you may no longer be able to rely on contractual entitlements to immediately call on security or terminate agreements with trading partners who encounter financial strife or have administrators or liquidators appointed.  We recommend reviewing your trading documents to confirm whether or not you are affected by these recent changes, and to strengthen your trading terms where available to maximise your protection.

Franchisors, know your rights!

Recent changes to the law mean you may no longer be able to rely on contractual entitlements to immediately call on security or terminate agreements with franchisees or suppliers who encounter financial strife or have administrators or liquidators appointed.  We recommend reviewing your trading documents to confirm whether or not you are affected by these recent changes, and to strengthen your trading terms where available to maximise your protection.

What is Ipso Facto?

Ipso facto clauses allow a party under a contract to terminate or modify the application and operation of the contract if and when an insolvency event takes place.

Ipso facto clauses are common in commercial contracts. An example is a supply agreement between a supplier and a customer that allows a supplier party to terminate if an administrator is appointed to the customer.  Other common ipso facto clauses include rights to call upon security (bank/personal guarantees), suspend services, works, credit or the supply of goods.

Why are there changes?

The changes are introduced so companies who are experiencing financial difficulties are given breathing space and allowed to continue to trade while it recovers from an insolvency event.

From 1 July 2018, when a party enters into certain formal insolvency process, the other party will not be able to rely on the rights in ipso facto clauses for a certain period of time if the right is triggered by:

  • An application or announcement for a scheme of arrangement for the purpose of avoiding being wound up in insolvency;
  • A managing controller (including receiverships) appointment to the whole, or substantially the whole of the company’s property; or
  • The company entering into voluntary administration.

Duration of stay

The stay period commences upon the occurrence of the insolvency event, and ends depending on the nature of the insolvency event.

Unless otherwise extended or modified by the Court:

  • Scheme of arrangement
    • the stay period ends three months after announcement, or if an application is made, when the application is finalised or otherwise when the company is wound up;
  • Voluntary administration
    • the stay period ends when the voluntary administration ends, or the company is would up; and
  • Receivership
    • the stay period ends when the control of the receiver or managing controller ends.

Which contracts are affected?

The new laws only affect ipso facto clauses in contracts or agreements entered into on and from 1 July 2018. All other contracts or agreements entered into before this date are not affected.

Exemption

The Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 excludes certain situations from the stay provisions, and a list of non-exhaustive examples includes:

  • If you are novating, assigning or varying your existing contract (entered pre-1 July 2018), your contract will be excluded from this regime if, the novation, assignment or variation is made before 1 July 2023;
  • Certain sophisticated financial products, securities, bonds, promissory notes and syndicated loans are exempted;
  • High-value construction contracts (over A$1b) have been exempted until 1 July 2023; and
  • Various government and public hospital/health contracts have been exempted.

You should seek legal advice before exercising rights of termination or variation under an ipso facto clause as there are consequences for wrongful termination or acting in reliance on an unenforceable right under an ipso facto clause.

Do not get caught out by this new ipso facto regime. We recommend reviewing your trading documents to confirm how the recent changes may impact your contractual rights. Necessary action may include amendments to your existing trading documents.

Macpherson Kelley’s lawyers have extensive technical knowledge and industry experience advising on contracts and commercial arrangements. To discuss how the recent changes to the law impact on you, and what your next steps are, please contact Paul Kirton.

This article was written by Paul Kirton, Principal Lawyer – Commercial, Scott Fitzgibbon, Senior Associate – Commercial and Aylmer Low, Lawyer – Commercial.