Suppliers beware – the Corporate Insolvency and Governance Bill
As we are nearing the end of the Corporate Insolvency and Governance Bill’s passage through Parliament, it’s time to take a cautionary pause to consider its impact on the supply chain.
Attention has been primarily focussed on this Bill within the context of insolvency and corporate realms. However, those engaged in the supply of goods and services should be mindful of the changes on the horizon.
Certain changes to be implemented by the Bill (once it becomes law) are temporary in nature specifically designed to address certain commercial ramifications of the coronavirus. However, others will be here to stay, such as those presently proposed by clauses 12 and 13 of the Bill dealing with the protection of supplies of goods and services.
Supply contracts frequently contain express termination provisions allowing a party to either suspend the supply of goods and/or services or terminate a contract in the event that the other party enters into an insolvency or unapproved restructuring process.
There are certain measures currently in place, which prevent suppliers of essential services (such as utilities and IT services) from enforcing some insolvency related terms, such as exercising termination rights in the event of a customer’s insolvency.
The Bill introduces new section 233B (Protection of supplies of goods and services: Great Britain) into the Insolvency Act 1986 (“Act”). Section 233B(3) of the Act will broadly prevent all suppliers (with certain limited exceptions) from exercising any contractual right to terminate the supply, or exercise any insolvency triggered termination right, or any other right to do “any other thing” in a contract for goods or services against a company which becomes the subject of “relevant insolvency procedure” by reason of such company being the subject of such procedure.
Points to note as follows:
- It is immaterial whether the right in question (such as the right to terminate) operates automatically or requires a party to serve notice upon the other. Both are prohibited under the Bill.
- Suppliers will be precluded from imposing any new conditions for the continuance of supply or demand payment of any outstanding pre-insolvency charges as a condition of continuing such supply (new section 233B(7) of the Act).
- If a supplier were contractually permitted to terminate a contract or supply prior to a company’s entrance into a relevant insolvency procedure, the supplier could not subsequently exercise that termination right once the company in question is in the insolvency period (new section 233B(4) of the Act).
- There is no apparent restriction preventing a supplier from terminating a contract when another type of termination event (i.e. one that is not a relevant insolvency procedure) has occurred after the start of the relevant insolvency procedure, but note the preceding point.
Relevant Insolvency Procedure
A relevant insolvency procedure includes any of the following:
- a moratorium under new Part A1 of the Act
- the appointment of an administrative receiver (unless another administrative receiver was already in office)
- a company voluntary arrangement
- the appointment of a provisional liquidator (unless another provisional liquidator was already in office); and
- a court order is made under new section 901C(1) of the Companies Act 2006 (being the new Part 26A restructuring plan (arrangements and reconstructions for companies in financial difficulties) introduced by the Bill).
Suppliers may still terminate a supply contract in the following limited circumstances (new section 233B(5) of the Act):
- in the case of a company becoming the subject of an administration, administrative receivership or liquidation, the administrator, administrative receiver, liquidator or provisional liquidator (as applicable) appointed over the insolvent company agrees to such termination; or
- in any other case, the insolvent company agrees to such termination; or
- the court is satisfied that the continuation of the contract in question would cause the supplier hardship and grants permission for the termination of such contract.
However, given the nature of such circumstances, seeking to rely on them may be problematic and cumbersome in practice.
Temporary Safeguard for Small Company Suppliers
There is a temporary measure of protection for small entity suppliers (“small suppliers”). Small suppliers include companies, limited liability partnerships, any other association or body of persons whether or not incorporated and sole traders.
Such small suppliers who have supplied goods or services to a company, which has become the subject of a relevant insolvency procedure between the date on which the Bill comes into force and 30 June 2020 or one month after the Bill comes into force, whichever is the later can still rely on contractual provisions that would otherwise be invalid under new section 233B of the Act.
A small supplier is determined by reference to whether it was in its first financial year at the time the customer in question becomes subject to a relevant insolvency procedure (being the “relevant time”).
Not in First Financial Year: A small supplier that is not in its first financial year at the relevant time qualifies as a small entity supplier if at least two of the following conditions were met in relation to its most recent financial year:
- the supplier’s turnover was not more than £10.2 million (proportionately adjusted if the most recent fiscal year was not 12 months)
- the supplier’s balance sheet total (the aggregate of the amounts shown as assets in the supplier’s balance sheet) was not more than £5.1 million
- the number of the supplier’s employees was not more than 50 (determined as provided in clause 13(7) of the Bill).
In First Financial Year: A small supplier that is in its first financial year at the relevant time qualifies as a small entity supplier if at least two of the following conditions are met:
- the supplier’s average turnover for each complete month in the supplier’s first financial year is not more than £850,000
- the aggregate of amounts which would be shown in a balance sheet of the supplier drawn up at the relevant time is not more than £5.1 million
- the average number of persons employed by the supplier in the supplier’s first financial year (determined as provided in clause 13(7) of the Bill) is not more than 50.
There are certain entities and services, which are not caught by provisions of new sections 233B of the Act as provided in new Schedule 4ZZA to the Act. These mainly fall within financial services (such as banks and insurance companies) and essential services excluded by the pre-existing provisions of the Act.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.