Termination clauses in supply contracts
When a company enters a rescue, restructuring or insolvency procedure, suppliers often stop supplying it under a contractual termination clause triggered by insolvency. This measure will prohibit termination clauses that engage on insolvency or are based on past breaches of contract. This will mean that (subject to certain exclusions) contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears.
	The Act will introduce new additional provisions to existing provisions in the Insolvency Act 1986 to widen the scope of the restrictions on termination clauses in contracts. This will prevent a much wider range of suppliers from terminating a contract due to a company entering a formal restructuring or insolvency procedure. The policy intention is to help companies trade through a restructuring or insolvency procedure, maximising the opportunities for rescue of the company or the sale of its business as a going concern. The measures will complement the policy for a new moratorium and restructuring plan procedure, which are aimed at enhancing the rescue opportunities for financially distressed companies.
	The current law under sections 233 and 233A of the Insolvency Act 1986 (Article 197 of the Insolvency (Northern Ireland) Order 1989) makes limited provision to invalidate termination clauses, in certain company insolvency and rescue procedures and in relation to specific supplies.
	The new provisions will prevent suppliers of a much wider range of supplies relying on termination clauses or doing ‘any other thing’, due to a company entering a qualifying restructuring or insolvency procedure. A new Schedule provides for the companies and services which are excluded from the provisions. They are predominantly financial services and essential services covered by pre-existing provisions of the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989. Where a contract for the supply of goods or services contains a termination clause or allows for any other thing (such as changing payment terms) to happen, this will cease to have effect under the new provisions. Where an event permitting the exercise of the right occurred before the restructuring or insolvency procedure commenced but the supplier had not exercised the right to terminate before the restructuring or insolvency event, the supplier will be unable to exercise it for the duration of the insolvency process. Suppliers will be prohibited from making payment of outstanding charges a condition of continued supply. Procedures to which this provision applies include the new moratorium and restructuring plan.
	Where the new provision applies, it will not be a requirement for the office-holder or directors to provide a personal guarantee.
	Small entities as defined, will be exempted from the provisions, as a time limited COVID-19 related measure. This exemption will be in place from the Act being enacted and coming in to force until 30 September 2020, with a power to reduce or extend this period. Where a company enters into an insolvency process after the exemption expires, entities of all sizes which supply the company will be bound by the provisions unless otherwise exempted.
	There are safeguards for suppliers in that they can apply to the court for permission to terminate the contract on the grounds of hardship. A contract can also be terminated with agreement from the company (where the company has entered a moratorium, voluntary arrangement or restructuring plan) or the office-holder (in any other relevant procedure).
	The intention behind the provisions is to maintain supplies of all goods and services to companies in restructuring and insolvency procedures by limiting the circumstances in which the supplier can terminate or alter the contract. This will help companies trade through a restructuring or insolvency process, thereby maximising the opportunities for the rescue of the company or the sale of its business as a going concern.