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No more termination of contracts on insolvency

11 Jun 2020

 

 

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.

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Short Richardson & Forth, 4 Mosley Street, Newcastle upon Tyne, NE1 1DE

Tel: +44 (0)191 232 0283  ·  Email: info@srflegal.co.uk

 

Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

Short Richardson and Forth Solicitors Limited is a private limited company constituted and run in accordance with the provisions of the Companies Act 2006. The term “partner” has been used to denote individual senior solicitors employed by Short Richardson and Forth Solicitors Limited.