Ipso facto clause (franchise insolvency termination)

A franchisee or a receiver meets this term when a franchise agreement says the franchisor may terminate if the franchisee becomes insolvent, and the franchisee has filed or is about to. Neither Act uses the words ipso facto; they describe the rule.

Under the Bankruptcy and Insolvency Act

Section 65.1(1) applies once a notice of intention or a proposal has been filed in respect of an insolvent person. No person may then terminate or amend any agreement, including a security agreement, or claim an accelerated payment or forfeiture of the term, by reason only that the person is insolvent or that the notice or proposal was filed. For a lease or licensing agreement, s. 65.1(2) adds a further barred reason: unpaid rent, royalties or similar payments for the period before filing. Section 65.1(4) lets a person require immediate payment for goods, services or other consideration provided after filing, and does not require a further advance of money or credit. Subsection (5) makes contrary provisions of no effect, subsection (6) lets the court declare the rule inapplicable if it would likely cause the applicant significant financial hardship, and subsection (7) excludes eligible financial contracts.

Under the CCAA

Section 34(1) says no person may terminate or amend, or claim an accelerated payment or forfeiture of the term under, any agreement with a debtor company by reason only that proceedings commenced under the Act or that the company is insolvent. Subsections 34(2) to (7) set out the same kinds of lease rule and exceptions as the BIA’s s. 65.1, including cash payment for goods and services provided after proceedings start.

See can a bankrupt seller’s trustee cancel my purchase contract and franchise termination.