Lifecycle of a Business – CIGA and Company Insolvency – Suppliers’ Rights to Terminate and the Company Moratorium
Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…
CIGA and Company Insolvency – Suppliers’ Rights to Terminate and the Company Moratorium
We’ve recently considered transactions which might be reviewed if a company becomes insolvent. Continuing with the insolvency theme, this article looks at how the Corporate Insolvency and Governance Act 2020 (“CIGA”) may apply to insolvent companies.
CIGA significantly changed UK insolvency law, introducing measures designed to support businesses facing financial distress and to assist them with getting their financial position back on track.
Included among its key provisions are the restriction on suppliers’ rights to terminate contracts, the option of a moratorium, and the introduction of the Part 26A restructuring plan, which allows financially distressed companies to restructure debts using a court-supervised process. While this article examines the first two provisions in detail, the Part 26A restructuring plan is beyond its scope.
Contractual termination rights
When is termination restricted?
CIGA prohibits suppliers of goods or services from terminating a contract or taking any other adverse action solely due to a customer’s insolvency, regardless of what the contract stipulates. This includes clauses that automatically trigger termination upon insolvency (known as ipso facto clauses) or require supplier action, such as issuing a termination notice.
If a company has entered into an insolvency or restructuring process, suppliers cannot terminate their contracts based on the insolvency alone, provided that the company continues to pay for the goods or services supplied. This prevents a struggling company from being left in the lurch by its suppliers solely due to concerns about its financial situation, even though it is still able to pay for the supplies; if the company can continue to receive supplies and trade, there is a hope that the company will be able to recover its financial equilibrium.
It is also prohibited for a supplier to condition the continued supply of goods or services on the payment of any outstanding amounts or similar demands. This ensures that suppliers cannot exploit the financial vulnerability of an insolvent company by imposing unfair conditions for maintaining the supply relationship.
If insolvency proceedings have commenced, suppliers are prohibited from terminating a contract for breaches that occurred before the insolvency process if they failed to act on those breaches prior to the proceedings. While termination rights linked to pre-insolvency breaches are restricted during the insolvency process, suppliers can still bring claims for such breaches either before the insolvency process begins or afterwards, assuming that the company is still in existence.
It should be noted that these restrictions only apply downwards in the supply chain; for example, there is no restriction on a company terminating a supply contract with one of its suppliers because of the supplier’s insolvency.
When is termination permitted?
However, termination is permitted during the insolvency process if the insolvent company consents to it. A court may also allow termination if continuing the contract would jeopardise the supplier’s own solvency or cause the supplier “undue hardship”.
If a contract includes a clause allowing termination for convenience (i.e. termination without needing to provide a reason or prove fault), this right also remains valid during the insolvency process, as the termination is unrelated to the company’s insolvency status. Similarly, if a contract naturally expires during the insolvency process, the supplier is not obligated to renew or extend it; the obligation to continue the supply of goods or services under CIGA applies only while the contract remains in force.
While termination rights based on insolvency alone are restricted, other grounds for termination (such as non-payment or material breach) can still be exercised if they arise after the insolvency event. This allows suppliers to potentially terminate contracts if the insolvent company fails to meet its obligations post-insolvency.
Moratorium
CIGA introduced a temporary relief period for financially distressed companies, known as a moratorium. During this time, companies are protected from enforcement action by creditors, allowing them to focus on recovery efforts. However, the company still needs to pay any new debts incurred and certain restrictions are placed on its operations. The intention is to provide the company with some breathing space from the risk of creditors taking action, during which time the directors can take steps to try and make rescue a viable option.
The initial moratorium period is 20 business days, which can be extended for another 20 business days without needing approval from creditors. Further, lengthier extensions can also be added if, for example, creditor approval is obtained.
Although the directors will continue to manage the company during the moratorium, a licensed professional called a monitor will be appointed. The monitor oversees the process to ensure the company is using the moratorium correctly and assesses whether the company can be saved.
As part of the process which establishes the moratorium, the directors will need to certify that the company is facing actual or impending insolvency, while the monitor needs to be confident that the rescue of the company is likely. If, during the moratorium, the monitor concludes that the company is unable to pay its debts as they fall due or that the company cannot be rescued, they will end the moratorium.
Practical considerations:
In light of the provisions of CIGA, insolvent companies should bear the following in mind:
1. Maintaining supplier relationships:
An insolvent company should focus on maintaining good relationships with suppliers. Open communication about the company’s situation and plans for restructuring can foster goodwill and potentially lead to more favourable terms during the moratorium period.
2. Understanding contractual obligations:
While CIGA protects against termination for insolvency, it does not shield the company from other grounds for termination, such as non-payment or breach of contract. Therefore, it is essential for an insolvent company to remain compliant with its contractual obligations to avoid triggering these grounds.
3. Utilising the moratorium effectively:
The statutory moratorium allows an insolvent company to pause creditor actions while it seeks to restructure. Companies should strategically use this time to negotiate with creditors and suppliers, reassess financial commitments, and develop a viable restructuring plan.
Disclaimer
This note reflects the law as at 4 April 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
