In Part 1, we discussed how, despite widespread usage, termination in the event of bankruptcy clauses (“ipso facto” clauses) are generally unenforceable pursuant to the bankruptcy code. In this second part, we discuss why these clauses are still prevalent in commercial transactions and the exceptions that allow for enforceability in certain situations.

Why Do Ipso Facto Clauses Remain in Most Contracts?

If ipso facto clauses are generally not enforceable, then why do practically all commercial agreements continue to include them? There are several reasons.

Practically all commercial transactions, including licenses, services agreements, and supply agreements, contain a provision that triggers termination rights, without notice, to a party whenever the other party files for bankruptcy or experiences other insolvency-related event. In Part 1 of a two-part series, we discuss how the commonly used termination-on-insolvency clauses are generally unenforceable despite their widespread use.

Standard Ipso Facto Provision

In the wake of the global financial crisis, Hong Kong’s key financial regulators, the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA), have jointly issued a consultation paper (Paper) that outlines proposals for establishing a resolution regime for significant financial institutions (FIs) that are in crisis or likely to collapse.