14 Aug Legal update from Tinsdills: Changes introduced to insolvency provisions and the law on termination of Business to Business supply contracts
The Corporate Insolvency and Governance Act 2020 (“CIGA 2020”) was first introduced as a bill in May 2020 and, having been fast-tracked though Parliament in light of the COVID-19 pandemic, came into force on 26 June 2020.
According to its explanatory notes, “the overarching objective [of the CIGA 2020] … is to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time” but, whilst the changes may bring relief to customers, they do little to help suppliers who are struggling to cope in the wake of the COVID-19 pandemic.
The CIGA 2020 introduces new provisions into the Insolvency Act 1986 aimed at ensuring the continuity of supplies and restricting contractual termination provisions related to events of insolvency. Whilst the CIGA 2020 has been fast-tracked in the wake of the COVID-19 pandemic, the changes introduced have been intended for some time and will be permanent, save in respect of a temporary ‘small suppliers’ exception.
The changes made by the CIGA 2020 are not intended to apply to consumer contracts but will apply to any B2B contract for the supply of goods or services. They will also apply to contracts for the sale of any assets, stock, consumables or other goods; intellectual property licences which also involve the provision of some services; and joint venture agreements (where the supply of goods or services will be an integral part of the wider transaction).
Effect of CIGA 2020 on insolvency procedure triggered provisions in contracts
If a company enters into a relevant insolvency procedure (such as liquidation, administration, moratoriums (including the new moratorium created by the CIGA 2020), voluntary agreements, the appointment of a provisional liquidator and other procedures) on or after 26 June 2020, a supplier of any goods or services to that insolvent company will no longer be able to rely on a contract term entitling the supplier to terminate the contract because of the commencement of insolvency procedures. Subject to certain exemptions, you must continue to supply to the insolvent company.
The CIGA 2020 also expressly prohibits making the continued supply of goods and/or services to a company after that company has entered into a relevant insolvency procedure subject to the payment of any outstanding charges for supply which accrued before the procedure began. You can no longer cease to supply because an invoice issued before the procedure began remains unpaid.
A person supplying goods or services to a company which enters into a relevant insolvency procedure will also no longer be able to rely on a contract term entitling it to do ‘any other thing’ as a consequence of that company becoming subject to such a procedure. This would include withholding deliveries from an insolvent customer if the trigger for that right is the entry into the procedure.
The restrictions will remain in place throughout the duration of the insolvency procedure. It is still potentially possible to rely on the termination (and other) rights contained in a contract for the supply of goods/services but only where the supplier can satisfy a court that not allowing the enforcement of such provisions would result in ‘hardship’ for the supplier. Unfortunately, the CIGA 2020 does not define what ‘hardship’ means and so it will be for the courts to interpret this as they see fit.
Temporary exemption for small businesses
Whilst the changes brought into force by the CIGA 2020 seem to favour customers over suppliers, there is at least some good news for small businesses who supply goods or services. As part of the CIGA 2020, a temporary exemption from the changes was introduced for qualifying small businesses.
The exemption will run until the end of September 2020 and applies to ‘small’ businesses who meet at least two of the following conditions (in their most recent financial year):
- turnover of not more than £10.2 million;
- balance sheet total not more than £5.1 million; and
- not more than 50 employees
This exemption means that ‘small’ business suppliers will still be able to enforce the provisions of their contracts during this period.
Other exemptions to the changes are available but these are limited in nature
Recommended actions for suppliers
- Review/redraft any standard contracts used by the business that involve an element of supply of goods/services so they are fit to be used under CIGA 2020.
- Review contract management procedures and retrain those responsible for managing any contracts with customers to which they supply to ensure that they understand the implications of the CIGA 2020.
- Review any existing contracts (particularly those of high value/importance) to identify any changes to the way in which they will need to be managed going forward.
- Review your processes for financially monitoring customer so that you can manage risk and ensure you have an earlier warning of any insolvency.
Suppliers will need to consider how to account for the additional risk that the CIGA 2020 forces them to take in any contract pricing. For example, suppliers may wish consider contracts that increase the amount payable in the event of non-payment within the contractually agreed time. There are, however, certain legal requirements necessary to make such provisions enforceable.
Additionally, suppliers may have to consider simply raising their prices to any business customers whose future solvency is in doubt, or, particularly in the case of high risk customers, insisting on payments being made before any supply take places.
If you would like to speak to one of Tinsdills’ commercial solicitors regarding the changes that have been introduced by the CIGA 2020 or to discuss amending your standard commercial supply contracts, please telephone on 01782 262031 or by email at [email protected]