Vol 18 (2021) - Issue 3

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Termination Rights in the Event of Insolvency: Where Are We Now with Ipso Facto Clauses; Are They Still a Potent Weapon in a Creditor’s Armoury

Introduction
Long term contracts frequently contain clauses which either terminate the contract automatically or entitle a party to terminate the contract in the event of the other party becoming insolvent; so-called 'ipso facto' clauses. The use of such clauses is controversial and in many jurisdictions such clauses are unenforceable because they are seen as allowing one creditor to take priority over other creditors in relation to property that should otherwise form part of the bankruptcy estate.
English law did not share this approach but viewed the operation of such clauses as being essentially a matter of contractual construction. That position has now changed with the coming into force of amendments to the Insolvency Act 1986 ('IA 1986') introduced by the Corporate Insolvency & Governance Act 2020 ('CIGA 2020'), which make ipso facto clauses in contracts for the supply of goods and services unenforceable against an insolvent party. The purpose of this article is to examine some of the issues which arise in relation to the
construction of ipso facto clauses and to explain the effect of the amendments to the IA 1986.
Ipso facto clauses are generally considered valid under English law. They do not, without more, offend against the public policy that prevents a party contracting out of the pari passu distribution of an insolvent's assets. Nor do they offend against the anti-deprivation rule, which prevents a party from withdrawing assets on bankruptcy, liquidation or administration so as to reduce the value of the insolvent estate to the detriment of creditors. As to the last, the Supreme Court held in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383 that the rule would not invalidate clauses which did not amount to an illegitimate intent to evade bankruptcy or insolvency law and had a legitimate commercial basis.