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Important Changes: Insolvency Events and Terminating Contracts


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 is begun, 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:
  • various contracts in the financial services sector;
  • 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;
  • where a supplier agrees with the insolvency office holder or company that the Act will not apply, or
  • 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 (iii) and (iv) 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.

If you would like to discuss any aspect of the above, please get in touch.

Update:

As of 1 October 2020, temporary modifications concerning (i) use of certain types of contractual terms as well as modifications to the moratorium procedure in Part A1 of the Insolvency Act 1986 (as inserted by CIGA 2020, s 1) are extended to 30 March 2021; (ii) company winding-up petitions are extended to 31 December 2020; and (iii) meetings of companies and other bodies are extended to 31 December 2020.

Update 17 February 2021:

Due to the ongoing impact of the pandemic, following December extensions to the relevant periods in relation to winding up petitions and the use of statutory demands (to 31 March 2021), a new statutory instrument has been drafted which will extend the date on which the power in section 20 of the Act to make temporary amendments to, or modify the effect of, corporate insolvency and governance legislation, expires, by a year – to 29 April 2022.

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