Exiting A Contract And Insolvency Events - Some common issues

It is a common problem that many companies face; how do we exit an unprofitable or unsuitable contract? There are a number of ways in which you can exit a contract, these rights may arise:

  • By common law
  • Pursuant to the express terms in your contract
  • Following an insolvency event
This article will consider exiting a contract following an insolvency event.

Insolvent Liquidation

What happens if the contracting party is placed into insolvent liquidation, i.e. it is compulsorily wound up?

  • It is possible that a contract is terminated as a matter of law;
  • Upon termination of a contract the contractual claim converts into a provable debt;
  • A liquidator can also disclaim onerous property pursuant to his powers under the Insolvency Act 1986. This means that the company’s obligation to carry out the contract is terminated and the other side’s rights against the company turn into the right to prove in the liquidation;
  • Looking at the matter from the other side, there may be a right for you to terminate the contract should the other party enter into an insolvency procedure. However, this will very much depend upon how your contracts are drafted and what you may be able to rely upon.
  • When a company goes into administration it is protected by what is known as a moratorium; The moratorium gives the administrator the time and protection to do his job without facing claims from the company’s creditors;
  • The moratorium lasts for the entire time the company is in administration. Whilst the moratorium is in force it is not possible to bring or continue with a claim against the company in administration unless you obtain permission from the court;
  • It is still not entirely clear whether service of a termination notice is restricted by the moratorium. Recent cases going through the courts are still considering this point.
Provisions in your contract to deal with events of insolvency

The right to terminate may hinge upon how well your contracts are drafted. Some of the points that you should consider including in your contracts to ensure that the right to terminate is protected are:

  • The appointment of an insolvency office holder, administrator, liquidator, trustee in bankruptcy of receiver;
  • The contracting party or one of its group enters into negotiations with creditors to reschedule debts;
  • The contracting party is no longer able to pay its debts as they fall due.
If you are faced with any of the above scenarios it is always advisable to seek professional legal help. The clauses in your contract will need to be considered as part of the wider picture, for example have you accepted the breaches for so long that you have waived your right to terminate? There are many risks involved with terminating a contract early which may not always be apparent. Seek prompt legal assistance, failure to do so could result in a potential claim against your company for damages.

Posted on 10/07/2015 by Ortolan

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