Getting Agencies ready for ipso facto reform

By Karen O'Flynn, Sharon Burnett and Catherine Whitby

28 Sep 2017

Agencies need to get ready for ipso facto reform by making changes to their contracts, funding agreements and contract administration practices.

Australian Government Agencies face constraints on their ability to terminate agreements where a contractor has entered into voluntary administration or certain other forms of insolvency procedure. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act, which amends the Corporations Act 2001 (Cth):

  • imposes a "stay" on the enforcement of rights, routinely included in commercial contracts, which permit the amendment (such as acceleration clauses), or termination, of an agreement where the contractor, structured as a company is undergoing a formal restructure. These clauses, sometimes called "ipso facto clauses", appear in most Agency contracts and funding agreements. They are also included in the Commonwealth Contract Terms; and 
  • also applies, as a consequence of last minute amendments made in the Senate by the government, to impose a stay on self-executing provisions having similar effect - for example, provisions which automatically terminate the contract on the contractor company's entry into voluntary administration.

About the stay

The stay operates as a kind of legal "pause" button. It stops a party who would usually be able to exercise rights which amend or terminate an agreement (or benefit from self-exercising clauses) doing so solely as a consequence of the company entering into administration, a scheme of arrangement or receivership.

Broadly, the stay will operate:

  • in voluntary administration: from the time the company comes under administration until the administration ends unless the administration ends because the company is wound up in which case the stay remains in place;
  • in a scheme of arrangement (which is for the purpose of the company avoiding being wound up): from the date on which an application under section 411 of the Corporations Act is made until the date that the application is withdrawn, or dismissed, or the approved scheme comes to an end or the company is wound up; and
  • where a managing controller (including a receiver) has been appointed to the whole or substantially the whole of the company's property: from the time of the managing controller's appointment until the end of the managing controller's control.

Agencies are able to apply to the court for an order that a stay on enforcement rights be lifted if it is appropriate in the interests of justice.

Importantly, the stay will not prevent an Agency from exercising other contractual rights to terminate during the period of the stay where these might exist (eg. rights to terminate for non-performance or breach).

The stay will also not apply:

  • if the administrator (or subsequently appointed liquidator), managing controller or scheme administrator consents;
  • to rights of a kind declared in Ministerial determinations still to be enforceable;
  • to types of contracts specified in the regulations or prescribed by Ministerial determination.

Considerations for Australian Government Agencies

The Government has announced that the stay on the operation of ipso facto clauses will commence from 1 July 2018.

It will apply only to rights arising under a contract, agreement or arrangement entered into after 1 July 2018. Agencies therefore have time to accommodate its impact by making changes to their contracts, funding agreements and contract administration practices.

As the Act has prospective application, applying only to contracts entered into after commencement, Agencies may wish to consider the feasibility of extending existing agreements which include ipso facto clauses or self-executing clauses with similar effect, to obtain the benefit of those clauses for an additional period.

Contracts that do not presently include options to extend may be extended by parties through the execution of a deed of variation varying the term or inserting, and affirming the parties' exercise of one or more options to extend that contract for a further period.

In addition, from 1 July 2018, agencies will need to ensure that, if they seek to exercise termination rights for other reasons (eg. breach of a material term) in circumstances in which a contractor is subject to one of the insolvency processes described above, they document the basis for termination in writing and ensure that this is set out clearly in any notice of termination. This will minimise the risk of a claim by the contractor that the termination is not on the basis of its alleged breach but by the contractor's entry into one of the identified forms of external administration.

Written documentation clearly identifying the basis for termination will also be critical where an Agency seeks to terminate for convenience in circumstances in which a contractor is subject to a form of external administration to which a stay on the enforcement of "ipso facto clauses" under the Act may apply. A clause which permits an Agency to terminate at will (eg. "at its absolute discretion, for any reason") will likely be construed as subject to the Act if set out in a contract which has been executed following the commencement of the Act.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.