Last year, the Corporate Insolvency and Governance Act 2020 made a number of changes to the UK insolvency landscape. Amongst the changes, was the addition of the “ipso facto” regime, which prevents suppliers terminating supply contracts as a result of insolvency-related events. Up until 30 June 2021, “small suppliers” were exempt from the regime. However, now the exemption has ended, what does that mean for those suppliers that were formally exempt?
What is Ipso Facto?
Most supply contracts contain a termination clause (also known as an ipso facto clause) which, on the occurrence of an insolvency related event, either:
- automatically terminates the contract, or
- entitles the supplier to terminate the contract.
The ipso facto provisions apply to contracts for the supply of goods and services and prevent suppliers from terminating a contract because a company has entered into a “relevant insolvency procedure” (i.e. administration, company voluntary arrangements, liquidation, the statutory moratorium and the restructuring plan), unless the contract is exempt or the supplier is an exempt supplier.
Small suppliers
Until 30 June 2021, small suppliers (those employing less than 50 people, having less than £5.1m assets or less than £10.2m turnover) could chose to terminate a supply contract if their customer entered a relevant insolvency procedure. However from 1 July 2021, notwithstanding the terms of the contract, small suppliers will now be caught by the regime.
Broadly speaking, although small suppliers will have to provide the goods or services that they have contracted to provide, this should not adversely affect many suppliers as the insolvent company will have to pay for any goods or services supplied post-insolvency, and there is also the option of applying to court for an exemption relying on the hardship exemption.
For more information on the ipso facto provisions, please see our quick guide.