Termination of contract by reason of insolvency is no longer permitted
On 26th June 2020 the Corporate Insolvency and Governance Act 2020 (‘the Act’) came into force. Amongst other issues ‘the Act’ provides that a supplier can no longer simply terminate a contract for the supply of goods or services or, refuse to supply a customer or, amend payment terms for a customer due to the customer’s insolvency. In addition ‘the Act’ provides that the supplier cannot make it a condition that arrears are paid up to date before they continue to supply the customer in the future.
It is standard practice to include in commercial contracts a right to terminate a contract to supply a customer where the customer has become insolvent or entered into any formal insolvency process. The Act will therefore cause a significant change in contract management and credit control procedures for suppliers.
There are exceptions to the new rules:
- If consent is given by the insolvent company or the insolvency office holder to allow the termination, refusal to supply or variation of payment terms by the supplier;
- If the supplier gets permission of the court for any of the above; or
- If you are defined as a “small supplier” for the period 25 June – 30 September 2020.
A supplier is a “small supplier” if it is not in its first year of trading and at least 2 of the following conditions apply to its most recent financial year:
Condition 1: the supplier’s turnover was not more that £10.2 million.
Condition 2: the supplier’s balance sheet total was not more than £5.1 million.
Condition 3: the supplier had no more than 50 employees on average.
Where the supplier is in its first financial year the definition is varied and the turnover figure will be adjusted proportionately, but its turnover must not exceed £850,000 in that first financial year.
Before taking any credit control measures or enforcement steps suppliers must be mindful of this new legislation.
For further advice and guidance…Talk to Tollers on 01604 258558 and ask to speak to the specialists in our commercial contracts or dispute resolution teams who will be happy to help.