Having worked in insolvency for a good many years, I understand that navigating the insolvency landscape can be daunting for directors, particularly during these challenging times. With the introduction of new legislation during the pandemic, such as the Corporate Insolvency and Governance Act 2020 (CIGA), it can be difficult to keep track of what protections are in place for businesses and how they affect your company’s contracts.
One of the permanent measures introduced by CIGA was a restriction on the termination of contracts by suppliers of goods and services to insolvent companies. This measure was designed to provide an opportunity for insolvent companies to continue to trade with a view to rehabilitation and to safeguard against suppliers terminating contracts as a result of entering an insolvency process.
However, despite this restriction, many standard terms and conditions still provide a right to terminate upon insolvency. In this blog post, I want to outline some of the common circumstances in which companies can still rely on these termination rights.
Firstly, it’s important to note that the prohibition on termination of contracts only applies to contracts “for the supply of goods and services”. This means that many types of contracts will not fall within the scope of the prohibition. However, difficulties may arise where a contract that does not appear on its face to be a supply contract contains a goods or services element.
Secondly, the prohibition on termination only applies where a company becomes subject to a “relevant insolvency procedure”. This means that termination clauses triggered by pre-insolvency steps, such as a notice of intention to appoint administrators, are not caught by the prohibition in section 233B. Additionally, other termination rights, such as those arising from non-payment or another material breach, can still be exercised in the ordinary way.
Thirdly, suppliers can still exercise their right to terminate contracts with an insolvent company where the relevant insolvency officeholder consents to the termination of the contract or where the supplier makes an application to court for permission to terminate on the grounds of financial hardship.
Lastly, there are exceptions to the application of section 233B, such as exclusions for essential supplies and contracts relating to financial services. It’s important to note that the restrictions also limit suppliers from making payment of outstanding sums a condition of continuing supply and making other changes to the contract pricing or credit periods as a result of the insolvency event.
Navigating the insolvency landscape can be challenging, but it’s important to understand the protections in place for businesses and how they affect your company’s contracts. By understanding the circumstances in which termination rights can still be exercised, you can make informed decisions about your business relationships and mitigate the risk of potential disputes. If you have any questions or concerns, it’s always best to seek professional advice.