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New Regime: Can a Contract be Terminated if a Party is Insolvent?

From 1 July 2018, a party to a contract will no longer have an automatic right to terminate that contract if the other party suffers an insolvency event (“Reforms”). An “insolvency event” may include voluntary administration (that is, say, where a company chooses to wind up voluntarily).

The focus of legislation in this area has now shifted. The emphasis is now more on restructuring companies and maintaining contractual relationships which allow a company facing insolvency to continue to trade through to recovery rather than being forced to wind up.

These new rights do not apply retrospectively and will only apply to contracts entered into from 1 July 2018.

Increased risk: What you need to be aware of

Historically (and subject to specific terms negotiated between the parties), contracts in trade and commerce have generally included clauses allowing a party to terminate a contract if the other party suffers an insolvency event regardless of whether the other party is in a position to continue their obligations under the contract.

With the introduction of the “ipso-facto” Reforms, the right of a party to rely on a contractual right to terminate that contract is now restricted. The Reforms impose a temporary stay on enforcing those termination provisions in the contract. This stay on enforcement ends when the period of voluntary administration ends or when the company is wound up.

Anti-avoidance provisions have also been introduced which require a party to obtain permission of the court to exercise certain rights under the contract which are inconsistent with the Reforms. For example, exercising a right to call on a guarantee or taking possession of a security asset.

The Reforms will not impact a situation where a party cannot pay its debts as and when they fall due. If a party is unable to perform under a contract, the other party is permitted to terminate for non-performance of the contract.

Exceptions

The Reforms do not apply to the sale of a business (including a sale of securities or financial products) and do not apply to renewals or variations of contracts which were entered into before 1 July 2018.

If you have any queries on your contractual rights in your business arrangements or any other commercial or business matter, please contact Meghan Warren on mwarren@burkes-law.com for further assistance.

Contacts

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (Hons) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Anthony Burke

Consultant

Anthony Burke

Consultant
B.A LL.B DIP.FIN. MGT
Tony is an LIV accredited business law specialist and a VCAT appointed Administrator. In 2008 he was President of the Law Institute of Victoria and served for two years as a director of the Law...

Stewart Davis

Associate

Stewart Davis

Associate
LL.B (Hons) B.Com
As well as property law, Stewart has had exposure to VCAT administration matters and commercial law, particularly servicing developer clients.

George Hanger

Associate

George Hanger

Associate
LL.B BA
George was admitted to legal practice in May 2015 after completing a Bachelor of Arts at the University of Melbourne and a Bachelor of Laws at Monash University.

Antonela Graso

Paralegal

Antonela Graso

Paralegal
Whilst completing her professional business and law tertiary qualifications, Antonela provides efficient and effective legal support services to our valued teams and clients.

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