Corporate Governance and Insolvency Bill 2020 (CIGA): Suspension of termination clauses in supplier contracts
The UK Government introduced CIGA 2020 last summer, with the aim to help businesses cope with the impact of Covid-19. The law sets in place various temporary and permanent measures to support businesses in financial difficulty.
The suspension of termination clauses in supplier contracts are one of the three permanent fixtures into insolvency law.
In normal circumstances a supplier is permitted to prematurely end a contract with their customers should the customer enter into insolvency. This would be done by activating the termination clause in the contract.
As part of the Corporate Insolvency and Governance Act (CIGA) 2020, the termination clause is void. This means suppliers are legally required to continue supplying to their insolvent customers, even if they have not been paid for previous goods provided.
Like with the entirety of CIGA 2020, the measure intends to help businesses survive Covid-19. Specifically, the suspension of the termination clause has been put in place with the hope that if the insolvent business continues to trade then they can, at worse case, do enough to pay back as many creditors as possible before going into liquidation and, at best case, recover and continue trading for the long run.
The following supplier groups are exempt from this law:
Those considered essential suppliers.
Small suppliers.
Contracts and persons who are involved in financial services.
Which factors define a ‘small supplier’?
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Their turnover does not exceed £10.2 million.
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Their balance does not exceed £5.1 million.
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They have fewer than 50 employees.
You can if:
- You can prove to the Court that continuing to supply an insolvent customer would cause severe difficulties for you.
- The customer that you’re supplying to consents for you to activate the termination clause.
- The insolvent customers office holder consents to the termination. Any insolvent customer has to hire an Insolvency Practitioner, who would act as the office holder and can consent on behalf of the customer for you to activate the termination clause.
You need to let Companies House know as soon as possible. Your Insolvency Practitioner will advise on how to do this.
Companies House need to be kept up-to-date on any changes to your company. This includes any extensions to a moratorium or if it is cut short.
Termination clauses are void: is this being unfair to suppliers?
If you are a supplier who cannot use any special exemption to activate the termination clause, you will have to honour the contract with your insolvent customer. The wisdom behind the law is that if a supplier can continue to provide goods to an insolvent customer without significant adversity caused to the supplier, they should do so as an effort to help businesses out and to keep the economy going as strongly as possible.