Various commentators have suggested that the number of companies becoming insolvent this year could be the highest since the financial crisis in 2009.

It’s a worrying time for businesses. Even those not themselves directly affected by insolvency can find themselves in difficulty when their own customers become insolvent, particularly if they are in any kind of long-term contract with an ongoing obligation to provide goods or services.

That’s all thanks to a change brought in by the Corporate Insolvency and Governance Act 2020, which severely limits the immediate steps that suppliers can take when their customers enter any kind of formal insolvency procedure (including a moratorium).

It’s very common for contracts to include a right for either party to terminate if the other party enters any kind of formal insolvency process. It’s a sensible protection to ensure you’re not required to carry on supplying a customer you fear may not be able to pay. Another common feature of goods supply contracts is a “retention of title” clause, allowing you to demand back any goods not yet paid for, if the customer becomes insolvent.

However, thanks to the 2020 Act, any contract term giving a supplier a right to terminate (or indeed take any other material step, such as demanding back goods or varying payment terms) just because the customer enters formal insolvency will be inoperable. You are stuck with the customer and the contract.

So what can you do?

Get your contracts and terms and conditions professionally reviewed

“Retention of title” clauses can be amended to ensure the right to demand back goods isn’t linked to insolvency.

Termination rights can be expanded to cover a customer having financial difficulties, or taking steps with a view to commencing a formal step (i.e. before the formal insolvency commences). It’s also sensible to consider including a right to demand regular financial information from a customer, as a quid pro quo for agreeing payment terms.

You should also ensure you have a right to terminate or suspend in the case of any non-payment of an invoice by its due date. If there is a grace period (i.e. where we have to tell them they are overdue and give them X days to pay before terminating or suspending), consider shortening it.

Where appropriate, “termination for convenience” clauses can be added, allowing you to exit a contract on notice, without having to rely on insolvency.

Your payment terms clauses can be updated to allow you to vary payment terms at any time without giving a reason (i.e. to avoid any link to insolvency).

Review the commercial terms of your contracts

Even in the case of customers who seem currently healthy, consider whether you really want to enter into long-term contracts which include an obligation to supply, and see if you can negotiate shorter terms but with a right to renew by agreement. That will at least reduce the duration of your exposure if the customer does have difficulties.

Where you are supplying goods over a period, try to structure the contract into smaller individual contracts.

Also try to reduce the volume of goods supplied under individual orders.

Finally, consider whether the payment terms in your contracts are appropriate or could be shortened, or even include staged payments, such as a certain percentage on order, and a reduced amount deferred.

Be more pro-active before a customer becomes formally insolvent

Chase your debts as soon as they are a day overdue.

Monitor your customers’ financial stability, perhaps by using third-party credit risk scoring tools such as CreditSafe. Be prepared to suspend or terminate for non-payment more readily than you might have previously, particularly if third-party tools suggest they are currently a credit risk.

What if the customer has already entered an insolvency procedure

Although you can’t terminate your current contracts for insolvency-related reasons, you aren’t required to renew those contracts and neither are you required to accept new orders (unless your contract says otherwise). Also check your contracts to see if there is any termination right you can rely on that isn’t linked to insolvency, such as termination for convenience.

The quid pro quo for suppliers having to continue to supply is that the customer is expected to pay for all supplies during the insolvency period. So you can still terminate for non-payment of debts arising during that period (though unfortunately not those debts that arose pre-insolvency – they’re still owed to you but you can’t take any immediate steps to recover them).

There is also some comfort in that, should the customer enter liquidation, supplies of goods and services during an insolvency period generally receive a higher payment priority than earlier supplies when it comes to working out how many pence in the pound each supplier gets.

For advice on any commercial or contract matter, please contact BHW’s commercial team on 0116 289 7000 or email

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