Letter terminating contract on insolvency

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A letter designed for use when terminating a contract after the other party becomes insolvent.

This template letter may be used in situations where one party terminates a contract on the grounds of the other's insolvency or bankruptcy. The template is short, and easy to adapt to the specific circumstances of a contract termination.

In the case of individual debtors, insolvency is commonly referred to as bankruptcy. This template may be used in relation to both the insolvency of companies and other incorporated entities, and the bankruptcy of individuals.

Professionally-drafted contracts usually contain a provision permitting one party to terminate in the case of the insolvency or bankruptcy of the other party. These provisions protect the terminating party, particularly in circumstances where the terminating party has an obligation to give credit in some form to the other party under the contract. Termination in the case of insolvency is usually effective immediately, upon the giving of a notice of termination.

In practice, it may be difficult to determine whether or not a debtor is in fact insolvent. Some cases will be clear, but others will not. For this reason, contract termination clauses that deal with insolvency will often elaborate the circumstances which will be counted as "insolvency" for the purposes of the contract. These might include a party being dissolved, ceasing to conduct its business, being unable to pay its debts (the broad statutory criterion), making arrangements with its creditors, having an administrator or other official appointed over its assets, or being the subject of a winding-up order.

In any case, you should review the contract in question carefully before issuing any notice of termination. You should identify the contract provision that gives you a right to terminate, and also the factual circumstances that bring that contract provision into play. You should also study the notice requirements in the contract, to ensure that your notice of termination is validly given.

The termination (or attempted termination) of a contract may result in the terminating party being subject to certain liabilities; you should therefore seek expert legal advice before terminating if you are unsure of your position.

Document statistics

  • Total words: 773
  • Total characters: 4826
  • Document pages (approx.): 1
  • Guidance notes pages (approx.): 1
  • Total pages (approx., including cover): 3

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