Terminating Contracts and Customer Insolvency

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Terminating Contracts and Customer Insolvency

Published 21 julio 2020

Suppliers are now prevented from terminating many contracts and supplies of goods or services if the customer is subject to a ‘relevant insolvency procedure’ (such as going into administration, CVA, or appointing a provisional liquidator).

This follows the Corporate Insolvency and Governance Act 2020, which came into force on 26 June. Although Coronavirus has accelerated the passing of the Act, these are set to be permanent changes.

What can’t suppliers do?*

  • Terminate the contract or supply (or do anything else, such as amend payment terms) on the grounds of a customer becoming subject to a relevant insolvency procedure
  • Terminate the contract or supply for any breach/es which occurred before the relevant insolvency procedure.

What can suppliers still do?

  • Terminate for breaches (such as a new failure to pay) which occur after the relevant insolvency procedure has started
  • Terminate with agreement from:
    • the administrator, receiver or liquidator (as applicable), or
    • the court, if continuation of the supply would cause ‘hardship’ for the supplier (although what this means is unclear, as it is not defined in the Act).

*Exclusions

  • Certain types of financial services (and aircraft equipment) companies and contracts, such as lending agreements, as listed in Schedule 12 of the Act
  • Small suppliers (two of: turnover ≤£10.2m, balance sheet total ≤£5.1m, employee number ≤50) – but only up to 30 September
  • If termination is already prohibited as an ‘essential supply’ (such as the supply of utilities, and of IT services, hardware or software which facilitate doing anything by electronic means). The Insolvency Act (section 233A) covers this, and applies instead.

Importantly, the provisions only apply:

  • To prevent suppliers (but not customers) from terminating
  • To contracts for the supply of goods and/or services (and not other contracts). However, an earlier House of Commons briefing paper indicated that the provisions are likely to apply contractual licenses (such as software and other IP)
  • After the customer becomes subject to an insolvency procedure – so you may want to consider promptly (and properly) exercising any existing termination right if it looks like your customer could start insolvency proceedings.

Authors

Isabella McMeechan

Isabella McMeechan

London - Walbrook

+44(0)20 7894 6954

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