How would changes to ipso facto clauses affect
An "ipso facto" clause is a contractual provision that
allows a party to terminate/vary the contract in specific
circumstances. The Government is taking aim at ipso facto clauses
that allow a party to terminate or amend any contract by reason
only of an "insolvency event".The measures aim to facilitate an orderly restructure of
a failing company and the concern is that those types of ipso facto
provisions pull the rug out from under the troubled
In a securitisation context, this has implications for the
validity of flip clauses, where a defaulting swap provider is
subordinated to other creditors in securitisation cashflows by
virtue of that default, which typically includes an insolvency
event. These clauses would be void under the new proposals.
However, securitisation swaps themselves should be unaffected
(including any termination rights) as the proposals do not extend
to close-out netting contracts protected under the Payments Systems
and Netting Act.
Key questions for the securitisation
It is not clear how the proposals (to be enacted in the
Corporations Act) interrelate with the restructure regime in the
Banking Act that applies to domestic swap counterparties.
Another area of concern is how far the proposals extend. Would,
for instance, a provision in a security agreement that grants the
secured party control over the secured property on the occurrence
of an insolvency event be void?
Making a submission
The Government has invited submissions on whether these
apply to all ipso facto clauses;
have retrospective operation (this would have implications for
existing securitisations); and
apply to all contracts and, if not, the classes of contracts
that should be excluded.
The closing date for submissions is Friday 27 May
Given the potential impact of the proposed changes, and the
areas of uncertainty, we urge you to consider making a
We will be contributing to the Australian Securitisation
Forum's submission and would be happy to discuss in further
detail the proposals and any submission you may wish to make.
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.
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