Commercial Contracts and the Impact of the UK Corporate Insolvency and Governance Act 2020

On 26 June 2020 the UK Corporate Insolvency and Governance Act (Act) came into force. One of the key provisions of the Act prohibits suppliers from terminating a contract (or doing “any other thing”) if their customer has entered into an insolvency process. This new legislation means that suppliers must continue to supply goods/services even if there is a risk that they will not receive payment for such supply and even if the customer was already in breach of the contract before entering into the insolvency process. The intention behind the provision is to ensure that supply chains continue to operate amidst the uncertainty created by the Covid-19 pandemic.

If a supplier wishes to terminate a contract because their customer has entered into an insolvency process, the only way to do so will be with permission of: those handling the insolvency process; the court; or, in limited circumstances, the customer itself.

In addition, the Act contains provisions ensuring that companies facing financial difficulties can benefit from an initial 20 business day moratorium (or freeze) on any action from creditors in connection with enforcing a debt. The moratorium must be proposed by the company directors and a request filed with the court. The company directors continue to run the company but an insolvency practitioner must oversee the moratorium and inform any company creditors of its existence.

Advice for Suppliers:

1. Communicate with your customers if payment is not forthcoming;
2. Ascertain whether a customer has entered into an insolvency process;
3. If yes, consider whether permission to terminate your contract can/should be requested.

Advice for Customers:

1. Communicate with your suppliers if you are struggling to make payment;
2. Consider if a moratorium or any other insolvency process is required.

*It should be noted: some financial services will not be covered by the insolvency provisions described above; and “small entities” will also be temporarily exempt from continuing supply; and those providing essential services such as utility companies will continue to be governed by separate legislation.

If you require advice or assistance with any contract law matters please contact the Commercial Team at Poole Alcock LLP on 0800 389 7039 or via our online form.