In its ministerial statement this week in relation to its consultation on the proposals for a restructuring moratorium, the Government has indicated that it now proposes to consider implementing measures to tackle the unreasonable use of termination clauses in insolvencies.
What are termination clauses?
Termination clauses are, of course, found in most commercial agreements and are a means by which a party may terminate an agreement on the occurrence of certain events (invariably including insolvency of the other party).
Where a company is subject to insolvency proceedings, the triggering of a termination clause by key suppliers can have the effect of preventing a successful restructuring or recovery by disrupting that company's supply chain. This is a vicious circle for businesses that are financially challenged; suppliers withhold delivery when payment has been delayed, but companies need supplies to trade to allow them to then pay for more supplies.
Tackling unreasonable use of termination clauses
The Government's intention to tackle such use of termination clauses should be good news for those businesses faced with insolvency or considering a restructuring plan, and has been widely welcomed by representatives of the insolvency profession.
Clearly, however, such proposals are likely to have a correspondingly detrimental impact on the position of suppliers. Any legislation that impacts upon the ability of suppliers subsequently to exercise their contractual rights may well affect the willingness of suppliers to make the original decision to supply. There are two sides to this issue and, as always, striking the right balance will be the key to a workable legislative change.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
