The Corporate Insolvency and Governance Act came into force on 26 June 2020 introducing a number of reforms aimed at providing protection to companies in financial distress, particularly as a result of the COVID19 pandemic.
However, the reforms present a number of potential problems to suppliers. Specifically, a permanent provision has been added to the Insolvency Act 1986 which:
- Prevents suppliers of goods and services from terminating a contract simply due to a company entering a formal restructuring or insolvency procedure. This effectively renders void any contractual term that allows for automatic or elective termination in the event that the customer enters insolvency proceedings;
- Prohibits suppliers from enforcing contractual consequences trigged by the customer entering insolvency proceedings, such as the right to vary the contract; and
- Prevents suppliers from exercising a contractual termination right in respect of a pre-insolvency breach if the right is not exercised before the commencement of insolvency proceedings.
Application
The new provision applies to all contracts for supply of goods and services (with the exception of financial services) and applies to any 'relevant insolvency procedure'. This is defined as including: the new Part A1 moratorium, administration, administrative receivership, CVA, liquidation, provisional liquidation and a Part 26A restructuring plan.
Impact on suppliers
These changes will have a substantial effect on suppliers, who may be forced to continue supplying to customers in financial distress. Suppliers will potentially be at an even greater risk where rescue is unlikely, such as in liquidation processes.
Whilst suppliers can seek court permission to withdraw supply on the ground that continuing supply would cause hardship, the threshold for this is likely to be high. Whilst there is no case law on this point yet, it is thought that suppliers would possibly need to show that continued supply threatens the supplier's own insolvency. Additionally, suppliers will no doubt need to provide evidence of the economic effect of continued supply on its own financial position. Separately, suppliers may be able to seek the permission of the appointed insolvency practitioner for permission to withdraw their supply.
What does this mean for Insolvency Practitioners (IPs)?
Overall, the new measures should help to enhance rescue opportunities for financially distressed companies. IPs, and their clients, will likely benefit from suppliers being prevented from ending integral supplies or leveraging their position in the insolvency process by refusing to supply. This will be particularly beneficial for administrators looking to continue trade companies, as well as those hoping to complete a pre-pack administration sale of the business as a going concern.
As stated above, suppliers can request consent from the appointed IP to end their supply to the company. This provides IPs the flexibility to refuse consent where continued supply is integral to the company or alternatively provide such consent in order to end supplies which are no longer financially viable in the long-term or required for the purpose of a sale.
IPs appointed over companies with critical supplies should carefully review the terms of the supply agreements in place to assess whether the new provisions apply. IPs should also be aware that suppliers may start seeking re-negotiation of contracts in light of the new measures. IPs should consider taking legal advice on existing contracts in relation to companies over which they are appointed and their options going forward.
{Government introduces legislation to relieve burden on businesses and support economic recovery
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