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The Corporate Insolvency and Governance Bill: Termination on insolvency (ipso facto) clauses

29/05/2020

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United Kingdom

The new legislation will prevent suppliers of goods and services from terminating contracts, once a company enters either an insolvency procedure or the moratorium period also introduced by the bill.

  The UK government's new Corporate Insolvency and Governance Bill, which was published on 20 May (read our initial analysis here), makes provision for the insertion of a new section 223B in the Insolvency Act 1986.
 
This section prohibits clauses allowing suppliers of goods or services to terminate or “do any other thing” in relation to their supply contracts if a company enters a formal insolvency procedure (or the new freestanding moratorium, also introduced by the bill).
 
This is to prevent suppliers from making it a condition of ongoing supply that pre-insolvency arrears are paid, and from making other changes, such as increasing prices a condition for continuing to supply goods or services.
 
The new provision complements the existing sections 233 and 233A of the Insolvency Act 1986, which prohibit termination of utility, communications and IT supplies, by extending these restrictions to all kinds of suppliers (except small suppliers, temporarily).
 
Existing rights
 
Where a supplier is entitled to terminate the contract or “do any other thing” because of an event which occurred before the start of the insolvency procedure, the entitlement cannot be exercised during the insolvency procedure, save for where:
 
  • The company or officeholder consents to the termination; or
  • The court is satisfied that the continuation of the contract would cause the supplier hardship, and grants permission for termination.
 
Accordingly, where a supplier has an entitlement to terminate the contract on a ground other than insolvency, and suspects an impending insolvency of one its clients, the supplier would be well advised to terminate promptly on the other ground, if it wishes to do so. 
 
This is because once the company enters an insolvency procedure, it will not be able to terminate on any pre-existing ground, until the procedure is at an end.
 
Exemptions
 
These provisions do not affect the supply of insurance services, or banking or other financial services.
 
“Small suppliers” will temporarily be excluded from the regime until one month after the provisions come into force.
 
Small suppliers are defined as those that met at least two of the following conditions in the most recent financial year:
 
(i) A turnover not exceeding £10.2 million;
(ii) A balance sheet not exceeding £5.1 million; and/or
(iii) No more than 50 employees.
 
If you have any concerns or questions about the Corporate Insolvency and Governance Bill and its effect on your business, Fieldfisher's restructuring and insolvency team would be happy to assist.
 

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