The snappily entitled Corporate Insolvency and Governance Act 2020 (the Act) became law on 26 June 2020. It introduced a range of important (and in some cases permanent) changes to Insolvency law in an attempt to address certain issues made pressing by the difficulties facing many businesses as a result of the Coronavirus pandemic. Here we examine one of those permanent changes to the law, one which has curtailed the options available to those who regularly supply goods and services to corporate customers and interferes with the traditional freedom of contract.
Why do you need to know about the Corporate Insolvency and Governance Act 2020?
If your business regularly supplies goods or services to companies, you need to be aware of this change to the law and what steps you can take to protect yourself. If you own or manage a company (particularly if it is struggling financially) which receives regular supplies of goods or services, you also need to be aware of how this new law could assist you – and what steps your suppliers may take to protect themselves.
Many contracts between suppliers and corporate customers contain a term that allow a contract to be terminated (or the supply of goods or services to be terminated) if the customer becomes subject to an insolvency procedure. Alternatively, a contract may allow the supplier to impose conditions for continuing to supply good (such as payment of all arrears). This can make it difficult for a business in an insolvency procedure to go about putting itself back on an even keel, as its supply chain is often destroyed or disrupted by the insolvency procedure. The Act seeks to provide companies in this situation with a degree of protection. This is a permanent change to the law (with one minor exception).
What the Corporate Insolvency and Governance Act 2020 provides:
The Act provides that where the customer company has entered into a “relevant insolvency procedure” (to keep things simple, this covers most procedures – liquidation, CVA, moratorium etc), then, where a contract contains the relevant term, a supplier is:
- Stopped from terminating the contract (or the supply) or doing “any other thing” allowed under the contract that would otherwise have been triggered by the insolvency procedure (for example, imposing more severe credit terms on the customer).
- Stopped from terminating the contract for breaches which occurred prior to the insolvency procedure during the insolvency period.
- Stopped from imposing conditions on the future supply of goods or services (for example, that arrears are paid).
The Act has retrospective effect. It will, therefore, apply to contracts made before 26 June 2020. However, the customer needs to have been placed in a “relevant insolvency procedure” after 26 June 2020 for the Act to apply.
There are temporary exemptions from these provisions until the end of September 2020 for “small entities”. For an entity which is not in its first year of trading, it must meet two of the following three tests: have turnover of less than £10.2m; have a balance sheet total of less than £5.1m; have less than 50 employees in order to qualify as a small entity.
All contracts are caught by the provisions, except for certain financial service and utility contracts.
The Act provides certain limited exceptions: the insolvency office holder can be asked to consent to the termination of the contract/supply; alternatively the permission of the Court can be sought on the basis that a supplier would be caused “hardship” as a result of being forced to continue to supply good or services.
In an attempt to redress the balance back in favour of the supplier, supplies made after the date of the insolvency procedure are not affected by these provisions. Therefore the original contractual terms will still have effect (or will re-gain effect) for those post-insolvency supplies.
What to consider if you are a supplier of goods
If you are a supplier, we recommend that you regularly examine the financial health of each individual corporate customer and actively manage exposure to bad debts. You may wish to consider taking action to recoup arrears sooner rather than later. If you have standard terms and conditions (speak to us if you haven’t), you may want to review these to provide for non-insolvency triggers that allow you to terminate for failure to pay on time; alternatively or in addition, you may wish to consider taking a form of security (such as guarantees from the directors of the customer company) to give an added layer of protection against bad debts.
Labrums’ Business Solicitors can advise in detail on these and other provisions of the Act. We can assist you with the recovery of bad debts and help you pro-actively manage your cashflow to allow your business to flourish. We are also experienced at drafting bespoke terms and conditions that meet the needs of your business.