Limitations of Ipso Facto Clauses

An ipso facto clause is a common clause in contracts which enables one party to (typically) terminate or issue a default notice when the other party suffers an insolvency event. In 2018 and 2021, a number of provisions were introduced into the Corporations Act 2001 (Cth) to affect a 'moratorium' on the reliance of these kind of clauses.  The practical effect of these provisions is not to remove their enforceability, but rather place a 'stay' on the enforcement of certain insolvency events.

The following insolvency regimes may subject to a stay under the Act:

  • a creditors scheme of arrangement or compromise

  • voluntary administration

  • appointment of a manager or controller over all or a substantial amount of the company property i.e. receivership

  • a company that has come, or is under a restructure

It is important to note that this is not intended in impact any other rights a party may have in relation to other default events such as non-performance of a contractual term e.g. paying rent or demanding payment for services.

The stays are subject to exceptions and can be lifted by a Court or with the consent of a receiver or other authorised practitioner. The key takeaway is to be aware that an ipso facto clause may not be immediately enforceable where the above events are grounds for termination or default, despite what the contract may say. If you would like assistance or advice regarding the insolvency or other terminations provisions of your contracts, please get in touch.

Tina Cooper