The Corporate Insolvency and Governance Act 2020 was introduced as a response to the Covid-19 pandemic and is designed to increase the chances of company survival.
How does the Act protect companies?
The Act has put into place the following temporary measures (specific to Covid only)
- Preventing creditors to force companies into liquidation via a Court order (Winding up Order / Petition)
- Suspending wrongful trading laws. This means companies can carry on trading even if they know they are in serious financial trouble and risk Liquidation. Previously this was forbidden under the Insolvency Act 1986
The following permanent measures are in place (to be permanently embedded into law even after Covid)
- Allowing companies to apply for a moratorium. This will protect the business from legal action from creditors and buys them time to think about how they can restructure and rescue themselves
- Suspension of termination clauses in supplier contracts
- Allows companies to put in a place a restructuring plan
The purpose of this blog is to discuss the ramifications of the suspension of termination clauses.
In normal circumstances a supplier is allowed to prematurely end a contract with their customers should they enter insolvency, via the termination clause in the contract. In short, the suspension renders the termination clause void, which means suppliers are legally required to continue supplying to their insolvent customers, even if they’ve not been paid for previous good provided.
The entire wisdom behind the Act is to help businesses survive Covid-19. The suspension of the termination clause is specifically designed to allow a company to keep trading to the point that they can, at worse case, do enough to pay back as many creditors as possible and, best case, to get back on their feet and continue trading for the long haul.
This is, of course, good news for businesses but puts suppliers at a disadvantage, knowing they have to keep delivering to customers at a loss with only a small chance of receiving payment.
Are their exemptions?
The following groups are exempt from the law
- Those considered essential suppliers
- Small suppliers. These are suppliers who meet at least two of the following three conditions:
- Turnover does not exceed £10.2 million
- Balance does did not exceed £5.1 million
- Have less than 50 employees
- Contracts and persons involving financial services
None of these exemptions apply to me, can I still cancel a contract?
You can if:
- You can prove to the Court that continuing the contract would cause severe difficulties for you
- Your customer consents to termination
- The office holder consents to termination. The office holder would be the Insolvency Practitioner (IP) in charge of the customer’s company during an Administration or Liquidation.
What can I as a supplier do?
If you are a supplier who cannot use a special exemption to cancel a customer contract, you will have to honour it.
What you as a supplier can do is start to monitor your existing customers for signs of insolvency and financial difficulty before entering into a new contract.
Next steps
If you are a supplier who is worried or in the dark about their customers’ ability to pay for goods and whether they have any signs of insolvency or if you would like to find out more about the possibility of being exempted from the law, please call me on 0330 236 9930, 0330 236 9938 or 07961 116321. The first conversation is free of charge and all conversations are in strict confidence. You can also email me on vee@navigatebr.com
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