Prohibition on Termination Clauses – Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on 26th June 2020 and introduced various measures designed to relieve the burden on businesses during the coronavirus outbreak. One of the measures is the introduction by the CIGA of section 233B into the Insolvency Act 1986 (IA) which prevents a supplier from ceasing to supply a customer simply because the customer has gone into insolvency proceedings.

Sections 233, 233A and 233B of the IA all operate to prevent certain supply contracts from being terminated simply because a company enters into an insolvency process. The provisions are designed to ensure that supplies are not cut off to a company in order to help it to continue to trade in an effort to rescue the business.

The new section, 233B of the IA, applies to contracts for the supply of goods and services generally. Going beyond what the previous sections 233 and 233A covered. Any contractual term which allows for the automatic termination of the supply contract, or which allows the supplier to terminate, which is based on the customer going into insolvency proceedings, is effectively rendered inoperable by the new law.

Any other contractual consequence which is triggered by the customer’s insolvency is also rendered inoperable. So, if for example, there was a clause allowing the supplier to vary the contract if the customer goes into insolvency, then section 233B prevents this clause from being enforced.

Furthermore, a supplier cannot exercise a contractual termination right in respect of a pre-insolvency breach if the right is not exercised before the commencement of insolvency proceedings. For example, if the contract allowed the supplier to terminate for late payment and the customer failed to pay on time, section 233B means that this “past” event could not be relied upon to terminate the contract once insolvency proceedings have begun. This does not prevent a supplier from exercising any available contractual termination rights before a company’s insolvency, but does prevent them from relying upon an earlier breach once insolvency proceedings have begun.

The introduction of section 233B of the IA clearly has a wide-ranging reach and as termination for insolvency is a common clause in a lot of written contracts, this could clearly affect a large number of businesses who supply goods or services. While the new law does not completely prevent termination of the contract in these circumstances, care must be taken to ensure that if attempting to terminate the contract in an insolvency situation, this is permitted under the new law.

Interestingly there is a temporary exemption for small suppliers to 30th September 2020. If a supplier meets the criteria to be a “small entity”, then the provisions will not apply to them. For details about the criteria and also some general guidance, please see here: https://www.gov.uk/government/publications/corporate-insolvency-and-governance-bill-2020-factsheets/prohibition-of-termination-clauses.

For further information or guidance on any of the points raised in this article, contact BHW’s corporate team on 0116 289 7000 or email info@bhwsolicitors.com.