fbpx

“Ipso facto” escape hatch prohibited under insolvency reforms

There was a time when, if a company got into financial difficulty the contracting party could terminate the contract, even if the company had been meeting all its obligations. The “ipso facto” clause was the contract’s device that allowed this termination to take place. A Latin term that means, rather unhelpfully, “by the fact itself”, the ipso facto clause acted like a trip switch in a fuse box that the contractor could flick at the occurrence of an insolvency event, pulling the plug on the contract and bringing an end to the business trading. Not so now.

Contracts will no longer self-destruct at onset of insolvency

As part of the sweeping insolvency reforms that came into operation on 1 July 2018, new legislation has prohibited ipso facto clauses that once provided for a contract to self-destruct in the event of insolvency.

An insolvency event can include voluntary administration, receivership and schemes of arrangement. These are all processes where the company is trying to work its way out of financial difficulty.

The activation of the clauses has been particularly prevalent in the construction industry where parties seek to withdraw the obligation to continue providing their services in what they consider to be a risky business environment.

Ipso facto and safe harbour share common purpose

The new ipso facto provisions and the safe harbour reforms (discussed in previous articles) share a common purpose – to discourage directors and contracting parties from bailing down the escape hatch, and to get them to keep trading.

This essence of the ipso facto reform, that only applies to contracts, agreements or arrangements entered into after 1 July 2018, is to provide for a “stay” against the enforcement of those ipso facto clauses.

In other words, any action taken by a party relying on that ipso facto clause to weasel its way out of a commitment to stay the distance of the contract, would be suspended to allow the company to continue trading for the benefit of its creditors and employees, until the administration ends or the company is wound up.

A contracting party can apply to the court for an order that a stay on enforcement rights be lifted if it is appropriate in the interests of justice or, in the case of a scheme of arrangement, if the scheme was not for the purpose of the company being wound up in insolvency.

The very positive side of the change for creditors and employees is that the company experiencing financial difficulty can continue to trade while it still meets its obligations under the contract – without the other party pulling the contractual rug from under its feet.

Help at a time of change

With all the changes taking place in insolvency, we can guide you through the opportunities provided by the complex reforms, contact us to find out how (or if) this applies to your situation.

We Minimise Your Tax To Maximise Your Profit

Contact Rubiix and ask about our various business accounting services that will maximise your business profit!

Recent Blog Posts

Rubiix Breakdown: 2024 Federal Budget

by | Jun 6, 2024 | News | 0 Comments

If you missed it, the 2024 Federal Budget was announced on Tuesday 14 May 2024, with a heavy focus on cost-of-living including assisting States and Territories to build...

A cheerful barista handing a paper bag filled with baked goods to a customer in a cozy bakery, illustrating customer engagement strategies to increase foot traffic and customer satisfaction.

How to increase your customers

by | May 29, 2024 | News | 0 Comments

Blog Home How To Increase Your Customers Increase Your Customers: 2 Key Strategies for Business Growth Growing your business not only boosts your current cash flow but...

Launching New Products, Services or Business Ideas Into the Australian Markets

by | Apr 29, 2024 | News | 0 Comments

Blog Home Launching New Products, Services or Business Ideas Into the Australian Markets Navigating the growth of your business in Australia can indeed be a challenging...

Tax saving strategies

Top Tips For Tax Planning & Reduction

by | Apr 10, 2024 | News | 0 Comments

Blog Home Top Tips for Tax Planning & Reduction: Profits, Superannuation & Trusts Imagine what you could do with your tax saved.You could:Reduce your home loan.Top up...

Driving Profit Growth: A Holistic Approach for Business Success

by | Mar 12, 2024 | News | 0 Comments

Blog Home Driving Profit Growth: A Holistic Approach for Business Success Welcome to the journey of enhancing your business’s bottom line. Whether you're steering a...

Bitcoin tokens overlaid with fluctuating stock market graphs, symbolising the dynamics of Cryptocurrency and Tax return calculations.

Cryptocurrency and Your Tax Return

by | Jan 24, 2024 | News | 0 Comments

Blog Home Cryptocurrency and Your Tax Return In the evolving digital financial landscape, cryptocurrencies are more than just a trading asset; they're a new frontier in...

Exclusive New Client Offer

Contact our team today to get a FREE 30-minute meeting with one of our expert business accountants, including an ADDITIONAL free Financial Safety Checklist to help you on your journey to financial freedom.