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Changes to Termination Clauses

View profile for David Feakins
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On 26 August 2018, the Government announced its proposals to make extensive changes to the insolvency legislation currently in force within the UK. These proposed changes form part of the Government’s focus on “delivering a strong business environment in the UK” whereby they have sought ways in which to reduce the risk of company failures.

One of the proposed changes to be introduced will prevent suppliers from enforcing “termination due to insolvency clauses”; an approach which is common amongst other countries. These types of clauses allow a supplier to terminate an ongoing contract on the ground that one of the parties has entered insolvency. We come across this type of clause very often at Birkett Long.

The reasoning for this proposal is that the Government anticipates it will prevent suppliers from terminating a contract. This may, in turn, reduce the chances of the business suffering from a knock-on effect that jeopardises the ongoing sustainability and rescue of the business.

Based on the above proposals, if a company has entered into an insolvency procedure provided for by the Insolvency Act 1986, such as administration, liquidation or if the company has entered into a CVA, the termination clause contained within the contract would not take effect. Suppliers will, therefore, have to continue to fulfil their commitments under the contract and the Government hopes that, by doing so, the business in difficulty would have a better chance of survival.

It should be noted that certain types of supplier, such as those in the financial sector, will be classed as a special case and will not be affected by any proposed change.

If you are a supplier and your contract includes a termination clause, or if you are a business in difficulty and your supplier is intending to terminate the contract, please feel free to contact one of our specialists. I work in both the Colchester and Chelmsford offices and can be contacted on 01245 453870 or