The following Restructuring & Insolvency practice note Produced in partnership with Liz Downing of Skadden Arps Slate Meagher & Flom LLP provides comprehensive and up to date legal information covering:
Contracts often contain provisions to the effect that the contracts will terminate upon the bankruptcy or insolvency of one of the contract parties. These clauses, known as ‘ipso facto clauses’, are generally enforceable outside of bankruptcy.
An example of an ipso facto clause is as follows:
‘This Agreement shall terminate without any further notice or action by any party, (i) upon the institution by or against either party of bankruptcy, insolvency or receivership proceedings; (ii) upon either party’s making an assignment for the benefit of creditors, or (iii) the admission in writing of either party of its inability to pay its debts in the ordinary course of business’.
Since the enactment of the US Bankruptcy Code in 1979, ipso facto clauses are generally unenforceable in bankruptcy cases.
Three primary provisions of the US Bankruptcy Code address ipso facto clauses and render them unenforceable—these are Bankruptcy Code sections 541(c)(1)(B), 363(l), and 365(e)(1).
Generally, US Bankruptcy Code, s 541 defines what property constitutes property of the debtor’s estate.
US Bankruptcy Code, s 541(c)(1)(B), makes clear that a debtor in a bankruptcy case is not deprived of its interest in property, ‘notwithstanding... any provision in an agreement, transfer instrument or applicable non-bankruptcy law “that is conditioned on the insolvency
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