The coronavirus pandemic has caused problems for many companies and businesses in 2020. Governments have used ‘lockdown’ measures to control the pandemic. As a result, many companies have lost revenue and are in financial difficulties.
This situation creates a problem for everyone. If a company cannot pay its debts, it may go bankrupt. If this happens, its employees will lose their jobs. The government will lose tax revenue.
Another problem is that the company probably has contracts with other companies; for example, for the buying and selling of goods. If a company gets into financial trouble, it may not be able to pay other companies what it owes them. If that happens, the company in financial trouble will be in breach of contract.
Of course, there is always a possibility that a company will get into financial difficulties and not be able to pay its debts. Many commercial contracts have a clause in them, called a termination clause. The purpose of a termination clause is to give a party to a contract the possibility of ending the contract if certain events happen.
For example, a contract may contain a clause like this one:
“Termination for Insolvency
If either party becomes or is declared insolvent or bankrupt, then the other party may, by giving prior written notice to the non-terminating party, terminate this Agreement on a date specified in the notice.”
This kind of clause allows one party to terminate the contract if the other party becomes or is declared insolvent. Of course, in the current pandemic, many more companies are becoming unable to pay their debts and are insolvent.
Since the beginning of the pandemic, the United Kingdom government has implemented measures to try to help businesses which are struggling financially. One of these measures is an Act of Parliament called the Corporate Insolvency and Governance Act 2020 [CIGA]. One of the aims of this piece of legislation is to make it harder for companies to rely on these contractual rights of termination.
CIGA creates a process for companies who begin the formal insolvency process. If it does this, the counterparty to a contract cannot rely on ‘insolvency events’ in a contract clause as a reason for terminating the contract. This UK government hopes that this will give struggling companies some breathing space during what are very challenging and unexpected circumstances.
revenue – ‘Revenue’ is another word for the financial income (money) that a company or organisation receives.
debt – A debt is an amount of money that one person, company, or organisation borrows from another. One example of a debt would be if you borrowed money from a bank to pay your university tuition fees, or to buy a car.
Note: it is pronounced ‘dett’ (there is no ‘b’ sound – the ‘b’ is silent).
bankrupt – You are bankrupt if you cannot pay your debts and a court or other legal authority declares you bankrupt. Note that technically companies do not go bankrupt but ‘go into liquidation’.
employee - A person who works for a company or organisation under a contract of service and is paid wages or a salary for doing so.
to owe – If you have an obligation to pay money to someone, usually for something that you receive, then you owe them the money. For example, if I borrow £5 from you, I owe you £5. The £5 is a debt.
breach of contract – If you breach a contract, it means you have broken it in some way. Contracts creates rights and obligations; for example, the obligation to pay for something I buy. If I do not pay what I owe at the time the contract states, I have breached the contract.
clause – A contract clause is a particular part or section in a contract.
party to – A contract usually has two sides. The two sides, or parties, are called parties to the contract.
insolvent – If you are insolvent, it means that you cannot pay debts that you owe.
to struggle – In this context, ‘struggling’ means to have a lot of difficult dealing with something, such as a bad or difficult situation.
legislation – Legislation is the collective name for laws which have been passed, usually by a parliament.
Note that ‘legislation’ is always singular. We never say ‘legislations’. The Corporate Insolvency and Governance Act 2020 is a piece of legislation.
contractual – ‘Contractual’ is an adjective. It means ‘agreed in a contract’.
counterparty – A counterparty is the opposite side, or party, in a contract.
Can you complete the following sentences using one of the words or phrases from the Glossary section? There is an Answer Key below the exercise.
1. The contract states that the goods had to be delivered by the seller by the 31st October. It is now the 5th November. Because of this, the seller is in …………………………………………….
2. Last year we had to borrow £10,000 from the bank. We have paid some of it back, but we still ………………….. the bank £7,500.
3. I have looked carefully at the contract. Unfortunately, it does not contain a termination ……………………..
4. Under this sale of goods contract, the buyer and seller are the parties …… the contract.
5. One of the major …………………. …… ……………………………… in the area of sale of goods is called the Sale of Goods Act 1979.
1. breach of contract
5. pieces of legislation
Note: This article is an English language teaching and studying resource. It is not intended to discuss it. to be used as a source of legal advice. If you have a legal problem, you should consult a lawyer
© Cambridge Legal English Academy 2020