Termination rights and insolvency events

What is the ‘ipso facto’ regime?

The 'ipso facto' regime provides that an express right under a contract (including a right of termination) is not immediately enforceable against a company due to:

• the company entering into administration (including voluntary administration) or the company's financial position while under administration
• the appointment of a receiver where the receiver is appointed over the whole or substantially the whole of the company's property, or the company's financial position while such a receiver is appointed
• the company entering into a creditor's scheme of arrangement (including certain steps leading up to the scheme), or its financial position while subject to these steps; or
• the company being the subject of a restructuring, and its financial position while being subject to the restructuring.

Rather, such rights will be 'stayed' until the relevant insolvency event ends, the company is wound up or the Court otherwise determines. This also includes 'ipso facto' clauses which allow for termination on the occurrence of an insolvency event.

This regime does not apply to (and termination rights can be enforced in the event of):

• a receiver or other controller appointment that is not over the whole or substantially the whole of the company's property
• a deed of company arrangement
• a liquidation (at least in circumstances where the liquidation does not immediately follow an administration, creditor's scheme or restructuring)
• a restructuring plan; or
• projects where the parties are all individuals (eg a sole-trader builder) or where there is a bankruptcy event (as this affects individuals and not companies).

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What contracts are affected?

The changes to the Corps Act apply to contracts entered (signed by both parties) into after 1 July 2018. If you are administering a contract entered into before 1 July 2018, the changes to the Corps Act will not affect your client’s contract, unless there is a variation or novation to that contract that is made after 1 July 2018.

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How are the ABIC contracts affected?

While Section Q ‘Termination of engagement’ in the ABIC contracts has long provided the parties the ability to immediately terminate a contract if a broadly-defined *insolvency event occurs, the 'ipso facto' regime now affects a party’s ability to terminate a contract for insolvency and therefore how a construction contract can be validly administered.

In ABIC contracts 'insolvency event' means anything that indicates that the person/party is or will be unable to pay their debts as and when they become due and payable including:

• the person is declared, made or becomes insolvent
• an execution or distress process is levied against the person's assets which includes the person's income
• the person enters into a deed of company arrangement with the person's creditors
• the person fails to comply with a bankruptcy notice or statutory demand served under the corporations law
• a provisional liquidator, liquidator, receiver, receiver and manager, administrator, scheme administrator, controller or other such administrator is appointed (whether by a court, creditor or otherwise) to the person or over the person's assets
• a trustee in bankruptcy, interim receiver, controlling trustee or other such administrator is appointed (whether by a court, creditor or otherwise) to the person or over the person's assets.

The ABIC contracts contain rights for the owner to terminate due to the occurrence of particular events.

For example, under the ABIC MW 2018 H Vic (Major Works Contract for housing in Victoria) form of contract:

• Section Q2 provides that the owner may immediately terminate the engagement of the contractor under the contract by written notice if an 'insolvency event' occurs in relation to the contractor
• Section Q14 similarly provides that the contractor may immediately terminate its engagement under the contract where an 'insolvency event'* occurs in respect of the owner; and
• *the term 'insolvency event' is defined broadly as 'anything that indicates that the person is or will become unable to pay their debts as and when they become due or payable', including a person being declared, made or becoming insolvent, the appointment of a liquidator, receiver or administrator or the entering of a deed of company arrangement.

As noted above, the application of the ipso facto laws means that a termination right may not be able to be exercised in all of these circumstances. Should there be any uncertainty about the extent to which a termination right can validly be exercised, legal advice should be obtained.

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What you need to know

If you are administering a contract entered into after 1 July 2018, the key issues for you to note are:

1. The changes to the Corps Act do not capture all 'insolvency events' as set out in the definition of insolvency event defined in Section S of the ABIC contracts. If, for example, the contractor is ‘declared, made or becomes’ insolvent, the owner can still terminate the contract in accordance with section Q without fear that such an action is inconsistent with the Corps Act.
2. The changes to the Corps Act do affect the rights of an owner which arise because of an 'insolvency event', such as where a contractor’s company enters into voluntary administration, appoints a receiver or manager, enters into a company scheme of arrangement, etc.
3. If an event referred to in item 2 above occurs to the contractor and the owner seeks to terminate the contract as a result, this would be unenforceable as a result to the changes to the Corps Act. In such circumstances the owner may be accused of having wrongly terminated the contract and may be exposed to a claim for damages from the contractor.
4. If you advised the owner to take steps under the contract or took steps under the contract on the owner’s behalf, which lead to such a claim by the contractor, you would likely become involved in the dispute and may be exposed to pay damages for the contractor’s or your client’s losses.

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Risks and recommendations

In the event an 'insolvency event' has occurred or may have occurred to a contractor on a contract you are administering, the following actions are recommended:

1. Immediately advise your client that they should get their own legal advice on their rights under the contract. Architects are not expected to be insolvency experts and should not be required to advise on the interplay between an ABIC (or any architect-administered) contract, the Corps Act and a contractor’s financial standing.
2. Do not advise your client on whether or not they can terminate the contract or exercise another right under it. Do not take or facilitate any such steps on their behalf. This would include not issuing a final certificate.
3. Only take steps under the contract which are recommended by your client’s lawyers.

Be aware that because of these new laws, advising your client on or acting on the client’s rights of termination can lead to a claim against you on the basis that you contributed to the owner exercising a termination right inconsistent with the Corps Act provisions. This is why it is recommended that you don’t act on termination rights without legal advice, and act in accordance with your client’s instructions (and their lawyer’s advice). As always, obtain your client’s instructions in writing.

The complexity of interplay of the ipso facto laws and ABIC contracts is outside the expertise of Australian Institute of Architects Senior Counsellors. If in doubt, access the Institute’s Free legal reference service or seek legal advice, and consider notifying your professional indemnity insurance broker.

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