New ipso facto regime clearer with final Regulations, but uncertainty for business and insolvency sector remains

The types of contracts excluded from the new ipso facto stay

The Regulations list the prescribed kinds of contracts, agreements or arrangements exempted from the operation of the ipso facto stay provisions.  We have set out the exemptions by reference to the industry to which they have the clearest connection.  They may, however, have application to more than one industry.  The Declaration also exempts certain kinds of rights from the stay, but has not yet been finalised, so that the table below does not reflect those rights. 

Some uncertainty removed - but more introduced?

The aim of the Government's recent insolvency reforms was to avoid the situation where a company  undergoing a restructure in administration, a compromise or arrangement is wound up in insolvency. Rather, the aim was to allow breathing space for a company to continue to trade during a formal restructure, in order that it might recover under a turnaround plan protecting the asset values for the benefit of the company, its employees and its creditors.

The operation of an ipso facto clause was seen as reducing the scope for any successful restructure, disrupting the businesses' contractual arrangements and destroying goodwill, potentially prejudicing other  creditors solely due to the termination of contracts by counterparties, due to the commencement of a formal restructure or the financial position of the company.

The Government has sought to balance this by preserving the right to enforce ipso facto clauses in a variety of situations where staying the operation of ipso facto clauses is either unnecessary or undesirable for example, where there is an established and sophisticated market mechanism or where it would be a commercial nonsense for an ipso facto right to be rendered unenforceable.

The exemptions specified in the Regulations will be critical to limiting the scope and effect of the ipso facto stay regime on counterparties. Getting the balance right is a challenge, and it is arguable that the final list of exemptions in the Regulations has not fully achieved it.

Some exclusions, such as payment and clearing systems, derivative contracts and netting arrangements, had been expected by the market, and are sensible because a stay would cause great uncertainty for, and undermine the operation of, the financial markets.

Other exclusions are much broader than the market had anticipated, and arguably raise more questions than provide answers, such as the exemption for all syndicated loans and capital markets issues. While the exclusions contained in the Regulations include financing arrangements generally, they do not contain any general right to accelerate a debt, nor do they include bilateral loans.

The exclusion from the ipso facto stay of any sale of business or share sale agreements allows the removal of a company's assets reducing the likelihood of any restructure.

Of some concern is that the lengthy list of contracts which are excluded by the Regulations from the ipso facto stay may lead to an asymmetrical enforcement of various parties' rights, which could result in materially different outcomes for stakeholders.

In addition, it is also arguable that the grandfathering of contracts entered into prior to 1 July 2018 may result in situations where some counterparties are entitled to enforce their rights under ipso facto clauses in pre-1 July 2018 contracts against the insolvent company, while other counterparties will not be in a position to exercise such rights contained in their post-1 July 2018 contracts. This will likely lead to contracting parties amending their contracts, rather than entering into new ones post 1 July 2018, so as to preserve the grandfathered status of their contractual rights under pre-1 July 2018 contracts.

We encourage our readers to familiarise themselves with the new ipso facto regime, review all existing contracts and consider how the reform might affect their businesses post -1 July 2018. In particular, you should ask whether any contracts to be entered into after that date might require re-drafting to mitigate the risks presented by the ipso facto reforms or to take advantage of the exclusions prescribed by the Regulations (and the Declaration when finalised).