Some of the most far-reaching Australian insolvency law changes are taking effect. These new laws will restrict the enforceability of a whole class of common clauses in contracts –so called 'ipso facto' clauses.
In this edition of FINSights, we explore what these changes mean for financiers, and outline key tips and issues they should consider as we move forward into the new regime.
Clauses that allow one party to terminate or modify a contract when a specific event occurs, regardless of continued performance by the other party. Examples include rights to:
You cannot enforce a right under an ipso facto clause if the right arises from the trigger events noted below. Ipso facto clauses triggered by any of these events are ‘stayed’.
The Trigger events are:
The new law is not a reason to remove ipso facto clauses from finance contracts. They will still work, absent a current trigger event.
Carve outs by regulation or declaration:
A lender is not obliged to fund an undrawn commitment under a facility agreement while a stay is in place.
A simple negative pledge restriction (for example not to grant security) should not be affected.
Competing debt: does your borrower have any facilities or note issues that will notbe stayed (eg pre-July debt)?
Default events: are there critical events which should be defaults, unrelated to the borrower’s financial position?
Revolving facilities preferred: rollover loans need not be readvanced (potentially giving rise to a payment default).
Syndicated loans: syndicated loans exempted.
Special purpose vehicles: contracts with SPVs in securitisation and project finance transactions exempted. Structure accordingly!
New rules will also apply to trustee borrowers (even if the trust is not affected by trustee insolvency).
Third parties: Termination of contracts with third parties (builders, lessees, purchasers etc) more difficult.