Proposed new laws preventing suppliers terminating contracts
The Corporate Insolvency and Governance Bill has been published and is being rushed through the legislative process by the Government as part of its measures to alleviate the effects of the Covid-19 Pandemic. The bill includes new insolvency processes, but significantly also includes new provisions restricting the ability of suppliers to terminate contracts or cease supply.
What is changing?
The new provisions mean that when a company goes into a formal insolvency process, a supplier to that company is not entitled to cease supplying goods or services under their contract simply because of the insolvency process. Contract terms that attempt to permit this are invalid.
Where the supplier was entitled to terminate the contract or supply before the company went into an insolvency process, because of an event occurring before the insolvency process, the supplier cannot then exercise that termination right once the company is in the insolvency process.
There is an exception where either the company’s administrator (or other insolvency practitioner) agrees, or a Court (being satisfied that the continuation of the contract would cause the supplier hardship) grants permission – Although of course that involves the cost, time and uncertainty of an application to Court.
There is also a temporary exception for “small entities” who have supplied to a company that has gone into a formal insolvency process at the relevant time. A small entity is one who (if it is not in its first financial year) satisfies at least two of the following conditions:
(1) turnover of not more than £10.2 million;
(2) balance sheet total of not more than £5.1 million;
(3) no more than 50 employees.
It is also worth noting that a supplier cannot demand payment of outstanding pre-insolvency charges as a condition of continuing supply.
Whilst this is only a bill at this stage, it will shortly become law in some form or other, and will no doubt cause hardship for (solvent) suppliers, in the name of helping (temporarily insolvent) customers.
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James Sarjantson can be contacted via telephone on 0113 201 0401 or email
James’ in-depth knowledge and many years of experience in these areas of law enables him to quickly identify the key commercial and legal issues, and to work with his clients to achieve objectives swiftly and cost-effectively.
Disclaimer: This blog is for general information and general interest only. It is not to provide legal advice on any general or specific matter, and no such advice is given. Should you like to discuss the points raised in this article, please do not hesitate to contact the author.