It has long been commonplace that commercial contracts include provisions for automatic termination, or at least the ability to terminate, on the insolvency of one party.
In a major change to that norm, the new Corporate Insolvency and Governance Bill proposes to restrict such clauses on the basis that they often jeopardise attempts to rescue the insolvent company.
Further, the Bill will prevent a supplier from making continued performance dependent on payment of outstanding debts.
So where will this leave suppliers? They will still be able to terminate where the company or the officeholder consents, or alternatively they can apply to the court and the court will grant permission to terminate if satisfied that continued performance would cause the supplier “hardship”.
The government guidance (found here) includes a case study where a company enters a moratorium and its supplier seeks to terminate solely on that basis. There are no arrears. The company does not agree to the termination, and the supplier therefore has to consider whether it has grounds to claim that it will suffer hardship if it continues to perform.
The only example given of hardship is the supplier’s own insolvency, and so no doubt there will be a raft of case law to further interpret the meaning of hardship.
Watch this space.
For more information, please do not hesitate to contact Alexandra Withers.