Supplier jeopardy - goods and services
On 20 March 2020, the UK Government published its Corporate Insolvency and Governance Bill (CIGB). When enacted, the new legislation will see the most extensive reforms to the UK’s restructuring and insolvency regime in more than 15 years. For the most part the changes take effect by way of change to the Insolvency Act 1986 (IA).
The CIGB introduces both (a) permanent reforms and (b) temporary reforms specifically designed to ease the burden on companies and directors caused by the Covid-19 pandemic. One change in the former category permanently adversely affects suppliers of goods and services but with temporary exception during the pandemic for smaller suppliers.
The new provisions (principally new section 233B(3) IA) mean that when a company goes into a formal insolvency process, a supplier to that company is not entitled to cease supplying goods or services or take other hostile action. The supplier can no longer hold the customer to ransom by demanding payment of outstanding pre-insolvency charges or exercising other rights or make other demands as a condition of continuing supply. If there is an obligation to make supplies the supplier must continue to make them subject to payment in accordance with the terms of the contract. Insisting on payment before delivery during the insolvency process may not be permitted either as this would be a unilateral variation of terms.
The new law operates by invalidating any termination provision whether they effect termination automatically or upon the supplier giving notice. Supply terms along these lines are standard and long standing so this is a somewhat a change in the balance of power away from a particular supplier in favour of customer and the wider community of suppliers and creditors to that customer.
Further, where the supplier is contractually entitled to terminate the contract or supply before the company goes into an insolvency process it will lose the right if remaining unexercised upon the customer entering the insolvency process (new section 233B(4), IA). This may cause suppliers to exercise default provisions more promptly, rather than risk losing the right.
Although not an express statutory exception, there also appears to be no prohibition on terminating where another type of termination event has occurred after the start of the insolvency proceedings.
The proposed law does not address third party guarantees explicitly. Thus a provision in the supply agreement addressing a change of circumstance around a guarantor such as its own insolvency should allow the supplier to insist upon the account being brought up to date as a condition of continued supply. It is notable that the protection of a personal guarantee from the office-holder available to some essential suppliers is not proposed under the new provisions.
There is a temporary exception for smaller suppliers whose rights to terminate/ freedom to take other action as just outlined will not be affected where the customer’s insolvency process commences during the pandemic. Smaller suppliers are those entities with a turnover of less than £10.2m. or, if in its first year a t/o of less than £850,000 per month, and with less than £5.1m assets and with less than 50 employees.
Suppliers will be mindful too that there are temporary restrictions of taking winding up action during the pandemic period using the statutory demand procedure or winding up procedure generally unless, in the latter case perhaps unless they have and can show the court reasonable grounds for believing that the coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway.