Ipso Facto – Encouraging Turnarounds and Preserving Enterprise Value

They allow counter-parties to terminate, or suspend contracts, where an insolvency event occurs. This act is value destructive for contract reliant businesses and leaves stakeholders with significantly diminished returns.

Written into almost every contract is a termination provision, known as an ipso facto clause, that allows a counter-party to terminate or modify a contract in the event of an insolvency, bankruptcy or receivership for the settlement of either party’s debts (even if there is compliance with all other contractual terms).

Enter the Enterprise Incentives Act

Passed through Senate on 11 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (“Enterprise Incentives Act”) is due to commence on 1 July 2018. Like the Safe Harbour reforms (also contained in the Enterprise Incentive Act), the ipso facto amendments look to promote a culture of entrepreneurship and successful turnarounds, by assisting viable, but financially distressed companies to continue to operate while they restructure their business.

Contracts entered into from 1 July 2018 will no longer be terminated, suspended, or modified due to insolvency. There will be limited exceptions contained in the accompanying regulations and declarations. These exceptions were recently debated by consultation, but are yet to be confirmed. It is hoped these amendments will preserve value in companies dependent on enforceable contracts to derive revenue and enterprise value.