A reminder of the restrictions on terminating contracts due to insolvency

This week, I have been advising two company clients who are owed significant sums from companies about to enter into Administration. Coincidently, both companies facing Administration were online shopping businesses. The clients sought advice on what steps they could take to protect or minimise their exposure in the time scales available.

It was a salient moment to reflect on the changes brought about by the provisions of ss14-15 and Schedule 12 of CIGA 2020. This broadly prevents contracts for the supply of goods and (non-financial) services from being terminated because a company enters into a formal insolvency process.

The law does allow a supplier to terminate a contract with the permission of the Insolvency Practitioner or with leave of the Court on the grounds that continuation would cause hardship. If the company had entered Administration and the business was being traded, a supplier is well advised to ensure that payment for future supplies is treated as an expense of the Administration.

This a reminder that it is not too late to undertake a review of any supply contracts. With careful drafting, it is possible to terminate for an insolvency related event but before the company enters into formal insolvency proceedings, for example if any step is taken with a view to commencing insolvency proceedings. It is also worth checking whether the contractual terms cover the new restructuring tools introduced by CIGA 2020, being the Part A1 moratorium and a Part 26A restructuring plan.

If you need any professional assistance in reviewing your commercial contracts, please contact our Restructuring & Insolvency team or Nick Phillips from our Information Technology team.

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