Many commercial contracts for the supply of goods and/ or services contain a mutual term whereby either party to the contract has the right to terminate it, if the other party commits an act of insolvency.
In respect of a company, that can include the other party going into liquidation, entering into a voluntary arrangement or administration, the appointment of a receiver or a moratorium comes into force in respect of a company (“an Act of Insolvency”).
However, due to Covid-19, the UK government introduced a ban on termination for insolvency in July 2020 – see s.233B of the Insolvency Act as inserted by the Corporate Insolvency and Governance Act 2020 s.14 (“the Legislation”) – even if a contract provides for it.
In short, that means your contractual right to terminate a contract for a company’s Act of Insolvency is now unlikely to be enforceable or only for a further short period of time.
Further, you are prohibited from making your on-going supply of goods and services after an Act of Insolvency has occurred conditional on payment of outstanding sums that fell due before the Act of Insolvency occurred.
The Legislation applies if a company entered into an Act of Insolvency after 26 June 2020. It applies to:
It applies to suppliers that are:
Exclusions apply to:
There is also a temporary exemption to the Legislation for small suppliers but that only lasts until 30 September 2020.
Section 15 of the Legislation provides that s.233B of the Insolvency Act does not apply to (small) suppliers where two or more of the following conditions applied at the time the company entered into an Act of Insolvency:
“Where the supplier is not in its first financial year at the relevant time, … in relation to its most recent financial year:
(“the Small Supplier Exemption”)
There are further provisions for assessing the exemption eligibility for small suppliers that are in their first financial year.
So, if you have a right to terminate a contract with a company, you qualify as a small supplier and wish to terminate for an Act of Insolvency, you need to get on and do so by 30 September 2020 at the latest.
If you are not a “small” supplier but have a right to terminate a contract with a company due to an Act of Insolvency, and you still want to terminate it, how might you do so:
The Legislation is permanent and will continue to apply even after any threat of Covid-19 has passed, so this prohibition on termination clauses is here to stay. That being the case, how can new contracts include provisions to deal with the effects of the Legislation. Some suggestions are:
HOW CAN CONEXUS LAW HELP?
Businesses and individuals will need legal advice to help them understand the risks they may face and the options that may be open to them.
We are available to assist in reviewing the laws in many jurisdictions across the world, and to review specific contracts. We are also available to provide practical, business-orientated advice on how to best protect yourself from the ongoing commercial effects of Covid-19.
For further advice on renegotiating your contractual obligations or pursing your contractual rights, please contact Ian Timlin.
T: +44 (0)20 7390 0280
M: : +44 (0)7767 427 332