Insolvent Parties – Be Careful of Terminating Contracts

From 1 July 2018 (or earlier if the date is moved forward), the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) which amends the Corporations Act provides a restriction on parties terminating contracts due to insolvency events. Contracts that give a party the right to terminate if the other party is insolvent may become unenforceable during the period of the stay allowed under the Act.

The legislation has been brought in to protect companies who are placed into voluntary administration, enter into a scheme of arrangement or have a receiver appointed in order to protect the value of the entity in circumstances where the entity is still adequately performing their obligations under the contract.

Legal advice should be obtained before terminating a contract when the other party is insolvent, as the exercise of a right to terminate which is unenforceable under the new provisions may lead to the non-defaulting party being sued for repudiation and damages.

The provisions do not prevent someone from terminating a contract if the party is in liquidation or otherwise in breach of the performance of the contract.

Note that the provisions only apply to contracts entered into after 1 July 2018 and will not affect existing contracts. However, it is important to obtain advice and update your existing standard agreements to ensure that they comply.

For all business law matters, please contact Phillip Leaman or a member of our Business Law team.