Important Changes: Insolvency Events and Terminating Contracts

Important Changes: Insolvency Events and Terminating Contracts

UK suppliers can now no longer rely on an ‘insolvency event’ clause in their contracts which, previously allowed termination of a contract with a corporate customer by reason of that customer's insolvency.

Introduction

The Corporate Insolvency and Governance Act 2020 (“the Act”) came into force on 26 June, after being quickly pushed through parliament. Its over-arching aim and effect is to allow businesses additional relief from creditor pressures and insolvency processes in a number of ways, against the backdrop of the coronavirus pandemic and its effects on the economy.
One element of the Act is that UK suppliers can now no longer rely on an ‘insolvency event’ clause in their contracts which, previously, allowed termination of a contract with a corporate customer by reason of that customer’s insolvency.

This means that suppliers now need to continue to supply insolvent corporate customers on an ongoing basis, as the right to terminate (or do anything else such as change payment terms, withhold deliveries, etc) on an ‘insolvency event’, is effectively void. The impact on commercial contracts and supply chains is likely to be significant.

 

Key Aspects

  • Suppliers can no longer stop supplying, or threaten to stop supplying, a company that has entered into an insolvency process or a restructuring procedure.
  • The new provisions take effect across all insolvency procedures, including the new moratorium and new restructuring plan that have been introduced by other parts of the Act (but schemes of arrangement under Part 26 of the Companies Act 2006 are excepted).
  • Suppliers are unable to use termination rights which arose prior to the insolvency process and which were not exercised before that time. Therefore, termination must occur before the insolvency process has begun. If you fear a customer is in difficulties, timing is everything and termination for non-payment of any outstanding charges or for any other non-insolvency related reason the contract provides for, should where possible, be made without delay. If there is delay, and an insolvency process begins, you will have to continue supplies.
  • However, note that it is still possible to terminate for a breach that arises post-commencement of the insolvency process; and it will still be possible, before a relevant insolvency procedure is initiated, to invoke a provision allowing the supplier to terminate if the customer to is unable to pay its debts when they fall due.
  • The Act has a retrospective effect, and so it applies to contracts already entered into before 26 June. Exemptions are limited only to:
  1. various contracts in the financial services sector;
  2. a short term, temporary exemption for ‘small’ suppliers until 30 September 2020 where a small supplier is one with, per last financial year statistics, a turnover of £10.2 million or less; a balance sheet of £5.1m or less; and 50 or fewer employees;
  3. where a supplier agrees with the insolvency office holder or company that the Act will not apply, or
  4. where continued supply would cause hardship to the supplier’s business – though here a court application needs to be made before it can be relied upon: neither quick nor cost effective for a supplier. ‘Hardship’ is not defined in the Act and no doubt litigation will arise, testing what is and what is not considered such.

 

What should you do now?

You should:

  • Review your contract terms in order to update precedents. Although clauses may now be void as to insolvency events, such clauses should be retained in any updated contracts in order to ensure that they provide a termination right in the event you wished to make an application to the court for relief; or otherwise agree a termination with the company under exemptions 3 and 4 above. Where applicable, review should include an update to the insolvency event clause to include the Act’s two new insolvency procedures.
  • Consider what other clauses should be changed in your templates and contracts such as shortening payment terms so that any breach occurring after the start of an insolvency procedure can be actioned without an otherwise lengthier period elapsing. You may also want to consider factoring in potential early warning signs of any difficulties into contracts, so that preventative action can be taken where appropriate.
  • Tighten due diligence into the financial standing of customers before entering into contracts, and ensure their financial position is monitored as the contract progresses to reduce potential risk on an ongoing basis, so you can terminate in a timely fashion if necessary.
  • Ensure staff responsible for managing contracts understand the implications of the Act.

 

For any queries, please get in touch with us at [email protected]smith.co.uk.

Mattersmith is a regulated legal practice committed to improving the productivity of legal and contractual processes, especially in the Investment and Tech sectors. We support you by taking the load off your everyday matters so that you can concentrate on the big and strategic issues for your business.

Make possibility reality

Become an IA FinTech Member
and see where it takes you.

Open-Lock_icon.png
Login to your account