Corporate Insolvency and Governance Bill: Protection of supplies of goods and services
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The Corporate Insolvency and Governance Bill (CIGB) has now been published, and is expected to pass into law in, or before, week commencing 1 June 2020. In this article we discuss the changes to suppliers' termination rights.
What is the background?
For some years, the termination (or ipso facto) rights of those that supply essential services (electricity, gas, communications etc.) to a company subject to a relevant insolvency procedure have been fettered (albeit, certain conditions/requirements must be satisfied for supplies to continue). In the CIGB those restrictions have been extended to all suppliers (subject to some carve outs).
How are suppliers' rights affected?
The CIGB provides that a provision of a contract for the supply of goods or services to a company ceases to have effect when the company becomes subject to a relevant insolvency procedure (including administration and liquidation) if, and to the extent that, under the provision:
- The contract or the supply would terminate, or any other thing would take place, because the company becomes subject to the relevant insolvency procedure or because of an event occurring before the start of the insolvency period, or
- The supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company becomes subject to the relevant insolvency procedure or because of an event occurring before the start of the insolvency period.
In addition, suppliers are prohibited from making it a condition of any supply of goods and services after the time when the company becomes subject to the relevant insolvency procedure, or do anything which has the effect of making it a condition of such a supply, that any outstanding charges in respect of a supply made to the company before that time are paid (or, to put it another way: suppliers cannot levy ransom charges for old debts).
However, suppliers should take some heart. The CIGB does not prevent a supplier from terminating a contract in respect of some event or breach that occurs after the company enters into a relevant insolvency procedure. That is to say, insolvent companies must continue to operate in accordance with the contract and discharge all invoices raised for supplies/services corresponding to the insolvency period. Nothing prevents the supplier from shortening payment terms or requiring upfront payment.
In addition, contracts can be terminated where the office holder consents, or the court is satisfied that the continuation of the contract would cause the supplier hardship.
What about small suppliers?
These provisions will not apply to small suppliers. To paraphrase: a supplier is a small supplier if at least two of the following conditions were met in relation to its most recent financial year:
Condition 1: Turnover was not more than £10.2 million.
Condition 2: Balance sheet total was not more than £5.1 million.
Condition 3: Number of employees was not more than 50.
Different conditions apply if the company is in its first financial year.
On the whole, and given the protection afforded to suppliers during the insolvency process, these changes are sensible, and should facilitate rescues, restructurings and/or sales without undue distractions. Small suppliers, and suppliers that would suffer undue hardship from the continuation of their supplies, should be aware of their rights.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.