The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) introduced a statutory stay on the enforcement of certain contractual rights triggered by insolvency events. The reforms changed how insolvency practitioners, creditors and counterparties manage distressed companies and contractual risk.
For insolvency practitioners, the ipso facto regime requires closer attention to the source of the contractual right, the timing of enforcement and the specific insolvency event in question.
This article discusses how the ipso facto reforms operate under the Corporations Act 2001 (Cth), with a particular focus on their practical effect on insolvency practitioners and the administration of distressed companies.
Why the Ipso Facto Regime matters in practice
Ipso facto clauses have long been used as a standard protective mechanism in commercial contracts. They allow a party to terminate, amend or enforce rights upon the occurrence of an insolvency event affecting the counterparty.
The policy concern behind the reforms was that the operation of ipso facto clauses can reduce the scope for a successful restructure, destroy enterprise value and prevent the sale of a business as a going concern. Those outcomes may reduce or eliminate returns in a later liquidation by disrupting contractual arrangements and destroying goodwill, which in turn may prejudice creditors and frustrate the objectives of voluntary administration.
For practitioners, the key point is that the law now favours preserving the business while a restructuring or administration process is underway. That changes both how contracts should be drafted and how rights should be assessed once an appointment occurs.
The statutory framework practitioners need to know
The 2017 amending Act inserted a statutory stay into the Corporations Act 2001 (Cth), preventing the enforcement of certain rights triggered by specified insolvency processes. The reforms took effect on 1 July 2018 as part of a broader effort to improve Australia’s financial rescue and restructuring framework.
Three provisions give effect to the stay.
(i) Section 451E: voluntary administration
Section 451E applies where a company enters voluntary administration. It prevents a counterparty from enforcing contractual rights that arise because the company has entered, or is under, administration, or because of the company’s financial position while under administration.
(ii) Section 434J: receivership over the whole or substantially the whole
Section 434J applies where a managing controller or receiver is appointed over the whole, or substantially the whole, of the company’s property. The stay does not apply where a receiver or controller is appointed over only part of the company’s property.
(iii) Section 415D: schemes of arrangement
Section 415D applies where a company proposes or enters into a creditors’ scheme of arrangement for the purpose of avoiding being wound up in insolvency.
The commercial objective of these provisions is to give distressed companies breathing space by preventing the rapid loss of key contracts and the collapse of going concern value. The stay is intended to allow businesses to continue trading and attempt rehabilitation rather than being forced into failure by cascading contractual terminations.
Two further points are critical for practitioners. First, the regime applies to contracts entered into after 1 July 2018. Second, parties cannot contract out of it. Attempts to build artificial workarounds into the contract may therefore be ineffective.
What an ipso facto clause is and why it now needs closer analysis
An ipso facto clause is a contractual provision that entitles a party to terminate, modify or exercise some other right upon the occurrence of a specified insolvency event, whether or not the counterparty is otherwise performing the contract.
A typical clause may read:
“Without limiting any other right A may have under this agreement or otherwise at law, A may terminate this agreement by notice in writing to B if an Insolvency Event occurs in respect of B.”
Ipso facto clauses have historically been regarded as protective boilerplate, but their inclusion in contracts entered into after 1 July 2018 must now be viewed through the lens of the statutory stay. The issue is no longer whether they exist, but whether they can be enforced at the point the right is sought to be exercised.
For practitioners advising administrators, receivers, secured creditors or counterparties, the practical question is no longer simply whether the contract contains an insolvency trigger. The question is whether that trigger is stayed, excluded or independently enforceable under the statutory framework.
Duration of the stay
The duration of the stay depends on the type of insolvency event that triggers it.
(i) Voluntary Administration
Under voluntary administration, the stay begins when the company enters administration. The stay period ends at the latest of the following: when the administration ends, when any court-ordered extension expires, or where the administration ends because the company is wound up, when the company’s affairs have been fully wound up.
The Court may extend the stay under if satisfied that it is appropriate in the interests of justice. In Rathner, in the matter of Citius Property Pty Ltd (Administrator Appointed) [2023] FCA 26, Justice O’Bryan granted a twelve-month extension of the convening period, which had the practical effect of extending the stay. His Honour emphasised that Part 5.3A of the Corporations Act 2001 (Cth) should be construed broadly and is not confined to preserving the value of the company. The Court may extend a stay where it is satisfied that doing so is in the interests of justice, particularly where the extension may achieve a better return for creditors than an immediate liquidation.
In practice, a court is likely to weigh the interests of the company and its creditors against the interests of the party seeking to enforce its rights, and may also take into account the broader public interest in successful restructurings.
(ii) Receivership
Where the relevant event is the appointment of a receiver or controller over the whole, or substantially the whole, of the company’s property, the stay applies for the duration of the receivership.
(iii) Schemes of arrangement
Where the triggering event is the proposal or entry into a scheme of arrangement for the purpose of avoiding insolvent liquidation, the stay applies for the duration of the scheme process.
The Scope of the Stay: What Is Actually Restrained?
Rights Triggered by the Insolvency Event Itself
The ipso facto regime restrains the enforcement of contractual rights that arise because a company becomes subject to a formal insolvency or restructuring process. In practical terms, the key question is why the contractual right arises. If the right is triggered by the company entering the relevant process, it will generally fall within the stay unless a statutory exclusion applies.
(i) Voluntary administration
The stay applies to contractual rights that arise because a company has entered voluntary administration or is under administration. Where a contract allows termination, suspension of performance or enforcement of other rights because an administrator has been appointed, those rights cannot be exercised during the stay period.
(ii) Receivership
The stay also applies where a receiver or managing controller is appointed over the whole or substantially the whole of the company’s property. Contractual rights that arise because such an appointment has been made, or because the controller exists, fall within the stay.
(iii) Schemes of arrangement
The regime also captures rights that arise because a company has commenced a restructuring process through a scheme of arrangement aimed at avoiding insolvent winding up.
This includes situations where the company announces that it intends to seek court approval for a restructuring, where the court application is made, or where a compromise or arrangement with creditors has been approved. If a contractual right arises because the company has entered that process, the right will fall within the stay.
Rights based on financial position and anti-avoidance concerns
The ipso facto regime also extends to contractual rights that arise because of the company’s financial position during the relevant insolvency process.
In practical terms, the regime prevents counterparties from terminating or enforcing rights simply because the company’s financial condition has deteriorated while it is undergoing a restructuring or insolvency process.
(i) Voluntary administration
The stay applies to contractual rights that arise because of the company’s financial position while it is under administration. This operates as an anti-avoidance measure.
Without this extension, a counterparty could sidestep the stay by relying on financial covenant breaches, liquidity deterioration or credit rating changes that inevitably arise once administration begins.
(ii) Receivership
The same approach applies where a receiver or managing controller is appointed over the whole or substantially the whole of the company’s property. Contractual rights that arise because of the company’s financial position during that period may also fall within the stay.
(iii) Schemes of arrangement
The regime also captures contractual rights that arise because of the company’s financial position while it is undergoing a restructuring through a scheme of arrangement.
This protection is necessary because the purpose of a scheme is to restructure the company’s financial obligations. If counterparties were able to terminate key contracts simply because the company is financially distressed during that process, the restructuring objective could be undermined.
(iv) The broader anti-avoidance limb
The regime also includes a broader anti-avoidance safeguard. A contractual right may still fall within the stay where the substantive basis for enforcement is the company’s insolvency process or financial distress, even if the clause is drafted in different terms.
For practitioners, the practical implication is clear. Where a termination right is closely connected to the company’s insolvency or financial collapse, it should be approached with caution. Even if the clause does not expressly refer to administration, receivership or restructuring, enforcement may still be challenged where the practical effect of the clause is to terminate because the company has become insolvent.
Carve-outs and exclusions
The ipso facto regime does not apply universally. In practice, an important part of the analysis is determining whether the relevant contract or contractual right falls within one of the statutory exclusions. These exclusions are primarily contained in the Corporations Regulations 2001 (Cth) and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018.
Excluded contracts
The Regulations exclude several categories of contracts from the operation of the stay. These include certain corporate transaction documents, financial market arrangements, government licences and permits, and some large-scale infrastructure and project finance arrangements. Contracts connected with essential public services, national security or defence may also fall outside the regime.
Grandfathered contracts
The regime applies only to contracts entered into after 1 July 2018. Earlier contracts are generally unaffected. However, the “grandfathering” rule for contracts entered into before 1 July 2018, including any novations, assignments, or variations, will cease to apply after 2023.
Excluded rights
Separate exclusions apply to particular types of contractual rights.
These include rights of set-off, certain rights to assign or novate contractual obligations, and rights to perform or enforce obligations through third parties.
A few exclusions are particularly relevant in practice. For example, step-in rights, commonly used in construction and infrastructure contracts, are not subject to the stay. This allows a principal to assume control of the work without terminating the underlying agreement.
Rights preserved under standstill or forbearance arrangements may likewise remain enforceable.
The practical point is simple. A contractual right should not be assumed to be stayed merely because it is connected to insolvency. The contract itself, the nature of the right and the applicable statutory exclusions must always be examined closely.
Practical Guidance for Insolvency Practitioners
This Part focuses on practical measures insolvency practitioners and their clients can take to manage counterparty insolvency risk under the ipso facto regime.
Pre-Contract Stage
The best protection usually starts before the contract is signed. A counterparty may appear stable at the outset, but that position can change quickly. Supply chain disruption, rising input costs, operational setbacks, loss of key customers, or unexpected legal and regulatory liabilities can all place pressure on a business. Because the ipso facto regime limits what can be done once certain insolvency events occur, early risk identification matters.
Basic pre-contract due diligence remains an important safeguard.
Public searches can often provide useful early insight without requiring the counterparty’s involvement. For example:
- (i) ASIC current and historical company extracts may reveal changes in directors, auditors, registered office details, and any prior appointments of administrators or receivers.
- (ii) Industry and media searches may indicate sector-wide distress or adverse developments affecting the counterparty.
- Commercial credit reports can provide a practical snapshot of payment history and credit reliability.
- Searches of AustLII, Jade or similar databases may reveal debt claims, adverse findings, or other liabilities.
- PPSR searches can help identify whether secured creditors already sit ahead in the recovery queue.
Depending on the value of the contract, the parties’ bargaining position, and the potential exposure if the counterparty fails, it may also be appropriate to request documents directly.
These may include recent financial statements, cash flow information, evidence of tax compliance, confirmation of payment arrangements with the ATO, and proof that superannuation contributions are current. Some counterparties may resist these requests for confidentiality or commercial reasons. The scope of diligence will therefore often depend on the relationship and the significance of the contract.
None of these matters proves insolvency on its own. But where several indicators appear together, they should prompt further enquiries and consideration of additional protections before credit is extended or the contract is finalised.
Contract Drafting Stage
The ipso facto reforms mean insolvency clauses can no longer be treated as standard boilerplate. They require careful drafting and a clear understanding of how the statutory stay operates.
The risk of getting this wrong is obvious. A clause may appear to provide an immediate exit, but in practice that right may be suspended.
Traditional insolvency clauses often define “insolvency events” broadly. They bundle together voluntary administration, receivership, liquidation and restructuring processes into a single definition, then provide for immediate termination if any of those events occur. The difficulty is that some of those events are subject to the statutory stay while others are not. A clause drafted in that way may create the appearance of automatic termination where no such right is immediately available.
A better approach is to draft with the stay in mind. Where a termination right arises solely because an administrator, receiver, controller or similar officeholder has been appointed, or because a party has entered a restructuring process, the clause should recognise that the right may operate subject to the statutory stay unless an exception applies.
Contract Termination Stage
When insolvency risk materialises, the first mistake is to assume that an insolvency-triggered termination right can be exercised immediately. The better approach is to review the contract carefully, identify whether any exclusion applies, and then assess whether the proposed termination right is one that may be affected by the stay.
If the contract or right does not fall within an exclusion, caution is required before acting on an insolvency-triggered default. The stay may apply to rights triggered by administration, receivership or a restructuring process. In some cases, it may also affect rights framed by reference to financial distress. A rushed termination can create liability of its own if the right was not in fact enforceable.
It is also unsafe to assume that delay will solve the problem. A party may expect the stay to expire and the termination right to become available, but that may not occur as quickly as anticipated. The Court can extend the period of statutory stay if it is in the interests of justice, particularly where keeping the contract on foot would achieve a better outcome for creditors than immediate liquidation. Rathner shows that this can happen in practice.
That said, the regime is not absolute. It does not prevent termination for genuine non-performance. If the counterparty has failed to pay, failed to meet contractual milestones, stopped work, or otherwise committed a substantive breach independent of the insolvency event, those rights may still be available.
The practical lesson is simple. Termination analysis now requires more discipline than it once did. Before acting, parties should ask three questions:
Does the contract or right fall within an exclusion?
Is the proposed termination based on insolvency, or on substantive breach?
Is there a real possibility that the stay may continue for longer than expected?
Why engage Ironbridge Legal?
Ipso facto issues in corporate insolvency often turn on timing, contractual interpretation and enforcement strategy. Early decisions can determine whether key contractual rights are preserved, suspended or lost.
Ironbridge Legal advises insolvency practitioners, lenders, investors and commercial counterparties on the practical operation of the ipso facto regime under the Corporations Act 2001 (Cth). We assist with contract analysis, termination risk assessment and enforcement strategy, with a clear focus on protecting commercial position while navigating the statutory stay.
If you are assessing contractual rights in an insolvency scenario or managing counterparty distress, we can help you analyse the position quickly and act with confidence.
Further Information
For further information about the ipso facto stay under the Corporations Act 2001 (Cth), the operation of the statutory stay during voluntary administration, receivership and restructuring processes, and the practical management of contractual rights in corporate insolvency, please contact the author of this article:
