Ipso facto clause An ipso facto clause is a contractual provision that allows one party to the contract to terminate or modify the operation of the contract upon the occurrence of a specified insolvency related event (such as the appointment of an administrator, receiver or liquidator) in respect of another party. Examples include: a clause that entitles a landlord to terminate a lease in the event that an administrator is appointed to the tenant; anda…
What you need to know
On 7 December 2018, amendments to the Australian Insolvency Practice Rules (Corporations) came into effect, which overhaul the manner in which assigned debts can be deployed in formal corporate insolvencies. These changes have the potential to significantly impact commonly used techniques for a solvent parent/group entity looking to control the formal insolvency of a subsidiary or affiliate.
The new rules – which apply to voting at creditors’ meetings in an external administration – make two significant changes of wide impact:
- For debt traders in particular: Evidence must be provided to the insolvency appointee, setting out the value paid for any assigned debts sought to be voted at meetings of creditors.
- For parent companies in particular: The “value” for voting purposes at meetings of creditors of any assigned debt held by a “related entity” is, broadly, only permitted to be what was paid for the debt by the related entity (and not the full face value of that debt). Obviously, this tends to lessen the control that a solvent parent/affiliate can assert in a meeting, if it has acquired third party debts of an insolvent group member for less than face value.
Although the impact of these amendments will largely be felt by related entities, they will affect any creditor who has been assigned a debt and wishes to vote at a creditors’ meeting in relation to that debt. We set out the detail of the definition of “related entity” at the bottom of this note.
In relation to timing, these new rules apply to all creditors’ meetings convened on or after 7 December 2018 at which a resolution is proposed – this is regardless of when the underlying debt was assigned or when the external administration of the company commenced. So, the new rules are of immediate impact on the insolvency landscape.
For those interested, some further detail follows.