COVID-19 - Impact on commerical contracts - Part 2

Since publishing our first article about the impact of Covid-19 on commercial contracts the Government has published the Corporate Insolvency and Governance Bill, which is set to bring in a number of sweeping changes to UK insolvency law. 

Amongst these are changes to the law affecting contractual termination clauses, whereby suppliers of goods and services will be prevented from terminating their contract once a company enters into either (i) an insolvency procedure or (ii) the new freestanding moratorium procedure being introduced by the Bill. 

The Bill, which has now had its third reading in Parliament, makes provision for the insertion of a new section 223B in the Insolvency Act 1986. This will prohibit contractual clauses allowing suppliers of goods or services to terminate or “do any other thing” in relation to their supply contracts, if a customer company enters a formal insolvency procedure or the new freestanding moratorium.

The intention behind this is to prevent suppliers from making it a condition of ongoing supply that pre-insolvency arrears are paid, or that customers agree to other changes (e.g. increased prices). This complements existing sections of the Act, which prohibit termination of utility, communications and IT supplies.

As such, where a supplier is entitled under their existing terms & conditions to terminate the contract or “do any other thing” because of an event which occurred before the start of the insolvency procedure, that entitlement cannot be exercised during the insolvency procedure or moratorium, save for where:

• there is a new breach after the insolvency procedure/moratorium begins; 
• the company (or insolvency officeholder) consents to the termination; or
• the court is satisfied that the continuation of the contract would cause the supplier hardship

Accordingly, any supplier who has an entitlement to terminate their contract on a ground other than insolvency, and who suspects an impending insolvency of one their clients, should consider terminating the contract promptly on the other ground, should it wish to do so. 

The new provisions will apply where the insolvency procedure/moratorium commences on or after the day on which the Bill comes into force. They will apply in respect of contracts entered into before as well as after that date.

There are exemptions for suppliers of insurance services, banking or other financial services.

“Small suppliers” (who meet at least two of the following conditions in the most recent financial year) will be temporarily excluded from the regime, until one month after the Bill comes into force:

• turnover not exceeding £10.2m
• balance sheet not exceeding £5.1m
• no more than 50 employees

By means of the above changes, it appears that the government is seeking to enhance the ability for businesses in financial difficulty to survive or be rescued, and will bring UK law in line with other jurisdictions where the exercise of insolvency termination clauses is already prohibited.

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