Has the Corporate Insolvency and Governance Act affected your termination clauses?

On 25 June 2020 the Corporate Insolvency and Governance Act (“the Act”) received royal assent and came into effect on 26 June 2020. The purpose of the Act is to relieve the burden on businesses during the COVID-19 pandemic and allow them to focus on continuing to operate.

The Act has brought about a magnitude of permanent changes to insolvency law. Of significance, is the fundamental change to the operation of most supply contracts and the ability to terminate.

Termination clauses – what is the issue

Many commercial contracts for the supply of goods and services contain clauses (often referred to as ipso facto clauses) to allow termination of the contract in the event that a party enters into any insolvency proceedings, or sometimes even if such action is threatened.

Typically, a supplier would refuse to continue supplying the other party in an insolvent situation and would often use the clause as leverage to try and obtain payment of previous debts. There have been increasing concerns raised that these clauses prevent those in financial difficulty from engaging in any meaningful insolvency procedure as the contract would simply be terminated in such an event.

What has changed?

The Act now states that, in most contracts concerning supply of goods and services, this type of clause will cease to have effect when the customer becomes subject to a “relevant insolvency procedure”. This is defined in the Act but can include anything from administration, the appointment of a receiver, liquidation, moratorium and a restructuring plan.

The provision is broad and prevents a supplier, not only from terminating but also to “do any such thing” because the other party is subject to an insolvency procedure.

There are some exceptions to the above rule, including certain types of, and size of, the supplier.

Whilst the intention is to help companies trade through an insolvency process (and improve chances of rescue), it has been acknowledged that the changes will clearly put the supplier at risk.

The Act does provide that relief is available to a supplier if there is ‘hardship’ suffered. This is not defined but government guidance suggests that this would involve the supplier being involved in insolvency procedures itself.

What should you do now?

As stated above, there are a number of exceptions and grey areas to this rule so it is important you seek legal advice to establish if you have been affected.

Serious consideration should be given if you are contemplating terminating an agreement with a supplier or partner due to non-payment or an insolvency procedure. Likewise, if you are considering entering an insolvency procedure yourself.

For further guidance and information on this issue, please contact a member of our team.