If your business supplies goods or services to UK customers, we strongly recommend you read this briefing note and act upon it without delay.

Currently making its way through Parliament under an accelerated procedure – introduced only late last month, it is expected to come into force before the end of June – the Corporate Insolvency & Governance Bill represents a significant overhaul of UK insolvency law.  The headlines about this piece of legislation have been dominated by the new insolvency procedures it introduces for a statutory moratorium and restructuring process.  It also includes significant corporate governance measures including Covid-driven temporary measures to alleviate company filing requirements as well as the suspension of the personal liability of company directors for wrongful trading.

One feature of the bill has received less publicity, yet it could have far-reaching consequences for many businesses and in particular, those which operate in the supply chain.  If your business contracts with businesses in the UK which might be at risk of entering into an insolvency procedure it is possible that your contractual termination rights may not be what you expect.

Many supply agreements contain termination provisions which allow the supplier to terminate the agreement immediately if the customer becomes insolvent.  Sometimes these rights can be triggered not just by the start of an insolvency process, but also by the other party simply threatening to suspend payment of its debts or entering into any form of negotiation with its creditors.  This is standard drafting and we see it used widely across the full spectrum of industries, both in negotiated contracts and in standard form terms and conditions of business.

The Corporate Insolvency & Governance Bill includes provisions which invalidate any termination provision which is triggered by the customer’s entry into most insolvency processes including the new moratorium.  This applies to contracts for the supply of goods or services.  Another provision prevents a supplier relying on a valid entitlement to terminate which may have existed before the customer enters an insolvency process, once that process has started.  So for example, you might have a contractual right to terminate a contract because a customer has been late in making payment, but if you haven’t exercised that right before an administrator is appointed over the customer, you will automatically lose that right.

This means you may well find yourself contractually bound to continue to supply once your customer has entered an insolvency process.  Then (to rub salt into the wound!), a supplier cannot demand payment of its outstanding charges as a condition of continuing supply.  The only crumb of comfort for suppliers is that it appears they will retain other termination rights if another type of termination event occurs after the insolvency proceedings have started.  Perhaps the most obvious of these being the common contractual right to terminate in the event of non-payment.

There are a number of exceptions to these general provisions, but they are limited in scope.  Suppliers which are small entities (in itself, a carefully defined term) get a brief window of opportunity when they will still be able to rely on insolvency event termination rights.  This will last for no more than a month after the Bill becomes law.  Certain financial services institutions and contracts are exempt and providers of utilities can ask an insolvency office holder to guarantee payments to them.  Suppliers can also request consent to terminate a contract from the company (in the case of a moratorium or CVA) or from the administrator, administrative receiver or liquidator, and if they decline there is an option to apply to the court for permission on the basis of supplier hardship.

What can suppliers do to mitigate their risk?  We think there are a number of steps any prudent supplier should take immediately.  Remember, time is very short; this Bill will become law in a matter of weeks:

·       Conduct a review of all your material contracts and identify those which contain insolvency termination rights.  Remember, the Bill applies only to contracts for the supply of goods or services and only to the termination rights of the party which is a supplier, not the customer or another contract party such as a guarantor.

·       Create a sub-set of these contracts which include termination rights triggered by the signs of a potential impending insolvency (e.g. threats to suspend payment, negotiations with creditors, a person becoming entitled to appoint an administrative receiver etc.).

·       Identify contracts where any other existing termination right has arisen but has not yet been exercised.

·       Work with your commercial colleagues to prioritise those supply contracts where you feel the customer may be at risk of insolvency.

·       Where you have a right to terminate now, consider whether your business will be better protected by exercising that right now, bearing in mind it will automatically cease once the customer enters an insolvency process.

·       Alternatively, where you have a valid right to terminate now, consider whether this can be used to support negotiations to obtain immediate payment of outstanding sums due under the contract in order to reduce your potential liabilities in the event of the customer becoming insolvent.

·       For those contracts where you decide to exercise a termination right, check that the customer has not entered into a relevant insolvency process and issue a valid notice of termination.

For further information and specific advice or support on this very topical issue, please feel free to contact me (Nick Benson) or any of my colleagues at Ortolan Legal – we’ll be happy to help.