Australia: Ipso facto clauses and insolvency

Last Updated: 9 February 2012
Article by Cameron Cheetham

Key Points:

Australia needs to rein in ipso facto clauses in order to develop a turnaround culture for financially troubled companies.

Within hours of Kodak's move into Chapter 11 bankruptcy, the internet was alive with bad jokes:

"Kodak's business didn't develop the way they expected."

"Kodak was overexposed to the GFC."

"Kodak's Chapter 11 hearing was held in camera."

Australian businesses and liquidators might be forgiven for thinking that the bigger joke is Australia's lack of a Chapter 11 turnaround culture.

Next year is the 20th anniversary of the "Harmer amendments", the rewrite of corporate insolvency lawswhich had as its centrepiece the new voluntary administration regime. Voluntary administration was going to be the legislative tool that finally gave financially troubled companies the tools they needed to restructure and avoid liquidation.

Unfortunately, voluntary administration never really lived up to the hype. There have been some successes along the way, but the statistics suggest that voluntary administration is, far more often than not, simply the scenic route to winding up and dissolution.

Our tough insolvent trading laws are often blamed for this, but that's not the view commonly taken by insolvency professionals. They are more likely to point the finger at ipso facto clauses – provisions in contracts that allow one party to terminate the contract upon the insolvency of the other.

Interestingly, when the Government recently conducted aninquiry into insolvent trading laws, a number of industry submissions discussed the importance of ipso facto clauses, even though they were not the focus of the inquiry. Some high-profile submissions pointed out that the operation of ipso facto clauses in commercial agreements can destroy businesses overnight.

Despite this advocacy, ipso facto clauses do not appear to be on the law reform agenda.

This situation may be contrasted with that in the US where there is a different emphasis on how to react to an insolvency. This difference is deeply rooted in US culture. Insolvency does not have the same stigma in the US as it has in Australia or the UK. Chapter 11 is still something to be avoided but, if it cannot, there is a concerted effort to salvage the business, because that is what US society expects. That more liberal approach to corporate failure reflects the relationship corporate America has with society generally (evidenced, for example, by the far more director-friendly application of the business judgment rule in the US).

That attitude is fundamentally different to the expectations of Australian society (rightly or wrongly illustrated by our now firmly entrenched insolvent trading provisions). American corporations are less regulated than their Australian cousins, but that comes at a price: in America, there is a greater expectation that corporate America will be the engine of growth and will determine the nation's prosperity. Hand in hand with that expectation is an understanding that it is okay if, every now and then, a company goes bankrupt – because that is the necessary cost of collectively pursuing the free enterprise system, which is intimately linked to the US political system.

This emphasis on doing business also means that, even in bankruptcy, there is an expectation that American corporations will try to survive, In Australia, on the other hand, we too often call for the screens when there's even the merest hint of financial troubles for a company.

In practical terms, these differences are reflected in the two countries' statutory workout provisions.

The focus on obtaining approval for a chapter 11 plan of restructure is largely aided by the ability of the debtor to preserve the value of its goodwill and minimize the disruption to its contractual rights. The immediate imposition of a stay on all enforcement actions (a feature of liquidation and administration in Australia, but not receivership) and the statutory prohibition on creditors' terminating contracts due to the debtor seeking chapter 11 protection,1 allow the company and its advisers to focus on restructuring its capital needs and maximizing any sale proceeds of its assets.

Often the most valuable asset of a company is its goodwill, reflected by the quality of its work-in-progress. By limiting the ability of trade creditors to terminate these critical contracts, the prospects of a genuine workout or improved sale price for assets are vastly improved.

Unsecured creditors in the US are generally compensated for the loss of their rights to terminate. One of the most common "first day" motions to the US Bankruptcy Court is for the payment of employee wages and benefits, insurance premiums and critical trade suppliers.

The introduction of a similar regime in Part 5.3A of the Corporations Act 2001, applying only to unsecured creditors for the duration of the convening period set out in section 439A(5), would significantly improve the prospects of an administration achieving the objects of section 435A.

Administrators are already personally liable under sections 443A to 443C for certain debts incurred during the course of the administration. Even if unsecured creditors were not directly compensated under Part 5.3A, the usual period they would be prevented from terminating would be some 4 to 5 weeks, short by US standards. I think corporate Australia would be willing to bear this cost, if it significantly improved the chance of businesses preserving value when they were insolvent.

Generally, the insolvency systems of the US and Australia suit the natures of their respective societies. However, that is not to say they cannot be improved from time to time: the Australian system would benefit immensely from a limited prohibition on the operation of ipso facto clauses.


1 See for instance section 365(e)(1) of the United States Bankruptcy Code

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.