• news-banner

    Expert Insights

Is terminating a contract for insolvency about to get harder?

Under English law, there is no common law right to terminate a contract on a counterparty’s insolvency. As a result, in all well-drafted commercial contracts it common to see a contractual right to terminate on the event of a party’s insolvency. However, the effectiveness of these contractual termination clauses may be about to change as a result of the Corporate Insolvency and Governance Bill 2019-21 (the “Bill”) which was published on 20 May 2020.

What does the Bill do?

In light of COVID-19 and the impact it has having on businesses, the Bill provides for amendments to the Insolvency Act 1986 (IA 1986) and the Companies Act 2006 (CA 2006) on several key areas, such as the temporary suspension of wrongful trading and restrictions on the presentation of winding up petitions. Significantly for commercial practitioners, the Bill will also invalidate contractual termination clauses in contracts for the supply of goods or services where termination is triggered by the other party's entry into in insolvency proceedings. This restriction is not entirely new – for example, “essential suppliers” (e.g. providers of electricity, gas, water, communications services and information technology) are already subject to a restriction on their contractual termination rights on insolvency – but the Bill expands the scope of this restriction to capture new suppliers and significantly curtails the usefulness of contractual termination rights upon an insolvency event. Furthermore, the Bill prohibits suppliers from making the payment of pre-insolvency debts a condition of on-going supply to a customer that has entered into an insolvency procedure. In addition, it is important to note that while some of the provisions of the Bill are stated to be temporary to deal with the impact of COVID-19, the measures relating to contractual termination rights will be permanent.

Are there any exemptions?

For suppliers there may be some comfort in the fact that there are some noticeable exceptions where contractual termination rights for insolvency can still be relied upon. For example, if an administrator or liquidator appointed over the insolvent company agrees to the termination or if the company which is subject to a moratorium, CVA or Part26A plan (the new restructuring plan provided for under the Bill) agrees to it. But the most significant exemptions that are likely to be relied upon by suppliers in order to terminate a contract for insolvency are:

  • the courts being satisfied that the continuation of the contract would cause the supplier hardship (although what constitutes “hardship” in practice is unclear);
  • the exclusion of contracts for supply of goods and services for a company in the context of financial services (e.g. if the insolvent company or supplier is a bank, insurer or payment institution); and
  • in the short term, a temporary exclusion for “small suppliers” (as defined in detail in the Bill) which permits them to rely on the contractual termination provisions that would otherwise have been invalid: (i) between the date on which the Bill comes into force and 30 June or (ii) one month after the Bill comes into force (whichever is later) if they have supplied a company that has gone into insolvency.
So what to do on a counterparty’s insolvency?

Whilst many small suppliers will want to check the Bill to see if they can rely on the temporary exclusion, for larger suppliers it will be a case of reviewing their contracts and checking to see if there are any other termination rights that can be relied upon (e.g. termination for convenience). Although not an express statutory exemption, there does not appear to be a prohibition on terminating a contract where another type of termination event has occurred after the start of the insolvency proceedings. It would also be worthwhile to do these checks sooner rather than later as the government have stated they intend to use emergency powers to introduce the Bill quickly, with an aim of receiving royal assent in June 2020.

For the longer term, suppliers should protect themselves by carrying out regular due diligence on their customers’ financial health and also by means of insurance (although this may increase costs). An awareness and understanding of the criteria to apply to the court under the hardship exemption will also be beneficial (although how long and complicated this process will be remains to be seen). What is clear is that UK government, coupled with its recent (albeit non-binding) guidance on responsible contractual behaviour, is keen to stress that organisations should be looking to settle disputes and avoid pushing businesses into insolvency in these extraordinary times.

Our thinking

  • Mental Health Management

    Nick Hurley

    Events

  • Doing business in the UAE & Israel

    William Reichert

    Events

  • Calculating Social Value in BTR

    Francis Ho

    Events

  • Dangers of trusts

    Mark Summers

    Events

  • In-House Insights

    Megan Paul

    Events

  • Heritage property and conditional exemption

    Sarah Wray

    Insights

  • City AM quotes Gareth Mills on the CMA’s new set of principles for regulating AI

    Gareth Mills

    In the Press

  • Hamish Perry and Mike Barrington write for The Evening Standard on whether a merger between the CBI and Make UK can work

    Hamish Perry

    In the Press

  • Silicon quotes Gareth Mills on the UK consumer lawsuit against Google

    Gareth Mills

    In the Press

  • Property Week quotes Louise Ward on the additional support required by aspiring UK life sciences operators

    Louise Ward

    In the Press

  • Sarah Higgins and David Wells-Cole write for Wealth Briefing on the pitfalls of using unregulated legal services

    Sarah Higgins

    In the Press

  • Office to Lab Conversions: A new lease of life (sciences) for some of London’s offices?

    Georgina Muskett

    Quick Reads

  • Charles Russell Speechlys’ UK offices receive environmental certification

    Kerry Stares

    News

  • Case analysis: URS Corporation Ltd V BDW Trading Ltd

    James Worthington

    Insights

  • True value adjudications; don’t jump the gun!

    Christopher Busaileh

    Insights

  • Financial Reporter quotes Rhys Novak on a new FCA review into the treatment of PEPs

    Rhys Novak

    In the Press

  • In-House Insights Programme 23/24

    Megan Paul

    Events

  • Restrictive covenants – who has the benefit?

    Georgina Muskett

    Insights

  • First time buyers relief and trusts

    Sarah Wray

    Insights

  • City AM quotes Ashwin Pillay on the latest round of ONS M&A statistics

    Ashwin Pillay

    In the Press

  • Property Patter: Top 5 Notice Traps

    Emma Humphreys

    Podcasts

  • The Family Fund: Bank of Mum & Dad 2.0

    Vanessa Duff

    Quick Reads

  • The perpetual struggle between the environment, heritage and development: the M&S decision vs 55 Bishopsgate

    Sophie Willis

    Quick Reads

  • Treasury Committee endorses mandatory venture capital diversity policies from 2025

    Lia Renna

    Quick Reads

  • Oops!....I did it again - Britney's third divorce

    Charlotte Posnansky

    Quick Reads

  • Product compliance and Brexit - UK Government concedes to CE markings indefinite recognition

    Jamie Cartwright

    Quick Reads

  • Recognising financial abuse in a relationship

    Vanessa Duff

    Quick Reads

  • Do I really need listed building consent?

    Sinead Conlon

    Quick Reads

  • Has the Orpéa plan impaired shareholder's consent? - Le plan de sauvegarde d'Orpéa n'a-t-il pas vicié le consentement des actionnaires historiques ?

    Dimitri-André Sonier

    Quick Reads

  • Will the downturn in the Paris region property market lead property companies to turn to ad hoc proceedings, as they did in the 1990s?

    Dimitri-André Sonier

    Quick Reads

  • Les défaillances en France proches de leur niveau de 2019 - French insolvencies close to 2019 levels

    Dimitri-André Sonier

    Quick Reads

  • Making BitCoin a BitClearer

    Charlotte Posnansky

    Quick Reads

  • Casino Group: An agreement with investors and debt holders is expected at the end of July

    Dimitri-André Sonier

    Quick Reads

  • Key figures gather to discuss the future of Gloucestershire

    Jonathan Morley

    Quick Reads

  • DIAC Issues First Annual Report

    Georgia Fullarton

    Quick Reads

  • One year on: "Influencer Culture: lights, camera, inaction" remains astonishingly accurate

    Caroline Swain

    Quick Reads

  • Saudi Center for Commercial Arbitration publishes new Arbitration Rules

    Peter Smith

    Quick Reads

  • Key takeaways from the UK Government's "Green Day"

    Martha Glaser

    Quick Reads

  • From Holby City to 5 Fleet Place - David Ames shares his experience of "Behind the Lens" with CRS

    Quick Reads

  • The Domestic Abuse Act 2021 in Action

    Sophia Leeder

    Quick Reads

Back to top