The Corporate Insolvency and Governance Act 2020 (“the Act”) was brought into law on 25 June 2020. This was in response to the financial effects on businesses of the COVID-19 pandemic. The Act was made with a view to assisting businesses that are struggling and it introduces a number of debtor friendly measures into restructuring and insolvency law which, up until now, has been considered mostly creditor friendly.
The key reforms introduced by the Corporate Insolvency and Governance Act 2020 are:
This article focuses on point 3, the new provisions which invalidate contractual clauses that allow for the termination of a contract where the company enters into a formal insolvency process.
The Corporate Insolvency and Governance Act 2020 introduces the rule that, when a company goes into a formal insolvency process, the supplier to that company is not entitled to cease supplying goods or services required under the contract, simply because of the insolvency process. The way that the provisions work is that they invalidate any contractual clause which would be triggered by the company’s entry into an insolvency process, regardless of whether the clause is triggered automatically, or requires notice of the other party.
Under the Corporate Insolvency and Governance Act 2020, a relevant insolvency process is any of the following:
Even in a case where, because of an event that occurred prior to the company going into an insolvency process, the supplier was entitled to terminate a contract or supply before the insolvency occurred, the supplier would not then be able to exercise that termination right after the insolvency process has started. However, the Act does not expressly exclude termination of a contract where the entitlement to terminate arises after the insolvency process has started so it is assumed that suppliers will still be able to take this action.
Once the company has entered into an insolvency process, suppliers are not able to make the continued supply of goods or services conditional upon the company paying any outstanding charges.
The Corporate Insolvency and Governance Act 2020 makes clear that a contract may still be terminated where, in the case of the company entering into administration or liquidation, the administration/liquidator consents to the termination, or in any other case, if the company consents to the termination. A supplier may also request the court’s permission to terminate but this will only be granted if the court is satisfied that the continuation of the contract would cause the supplier hardship.
A supplier that is a “small entity” may still be entitled to terminate a contract due to a company’s insolvency where the insolvency process occurs between the date that the Act came into force, 26 June 2020, and 30 September 2020. A business is a “small entity” if it satisfies two of the following conditions:
If the supplier is in its first year of trading, condition 1 is reduced to £850,000 and condition 2 is reduced to £5.1 million.
The new rules generally do not apply to the supply of goods or services to a company in the context of financial services, for example, banks, insurers and investment firms.
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