Contractual Suppliers - restriction on right to enforce termination clauses in supply contracts by reason of customer insolvency

The Corporate Insolvency and Governance Act 2020, which came into force of 26 June 2020, contains a ban on the operation of termination clauses in supply contracts for the supply of goods and services because the company receiving the supplies has entered an insolvency procedure (known as Ipso Facto clauses). It also prevents supplier companies from doing “any other thing” in respect of that supply contract, including varying the terms of the contract, increasing prices or seeking to enforce a guarantee. 

Please note this legislation only applies if you have a supply contract with the customer.

The purpose of this legislation is to attempt to give the insolvent company a greater chance of rescue or survival by enabling it to continue to trade and receive supplies, provided it can pay for these ongoing supplies.

A supplier is also prohibited from seeking a “ransom payment” for pre insolvency debts as a condition of continued supply.During the insolvency period the supplier should be paid for their services and supply. If they are not paid, they can then refuse to supply and terminate the contract. The payment of pre insolvency arrears will depend on the outcome of the insolvency process, as is currently the case

Provisions regarding continued supply have long been in place for essential utilities and communications, but the new legislation has extended this obligation to other suppliers of goods and services. 

Exception to obligations to continue to supply

Until September 2020 (which may be extended) small companies are excepted from the obligation to continue to supply. A small company is defined by meeting 2 out of the 3 following criteria; not more than £10m turnover, balance sheet net assets not more than £5.1m, not more than 50 employees.

There is no obligation to continue to supply if the Liquidator/Administrators/Receiver consents to the termination of the supply contract or the company consents.

A supplier can apply to court if it believes that being forced to continue to supply will cause it to suffer financial hardship; if the court is satisfied it will grant permission for the contract to be terminated.

Certain types of suppliers are excluded from this legislation including banks and insurers and contracts relating to the provision of financial services.

Conclusion

It remains to be seen what happens if suppliers just simply refuse to supply regardless of the new legislation. The insolvent company could of course seek to enforce continued supply via the courts but is this likely to happen? – there will be delays and costs associated with this. Also, in many cases if suppliers find that their invoice discounters will not fund invoices to companies in an insolvency process or their credit insurers refuse to continue funding, then suppliers are likely to fall within the financial hardship exemption. So, whether this legislation will have any real impact and assist with business survival is as yet unknown.

Advice

If you have a supply contract and your customer enters an insolvency process:

  • Speak to the relevant office holder (Liquidator/Administrator/Receiver/Monitor) and customer as soon as possible, to ascertain if supplies still required.
  • Speak to relevant office holder and look to assert any retention of title of claim you may have.
  • Speak to your credit insurers and invoice discounters where relevant to see if cover will be maintained and funding still available.
  • Consider whether you need an earlier trigger than a formal insolvency event as the default clause within your contracts in order to terminate the contract.

If you need further advice, please speak to your local RSM contact or a member of the restructuring advisory team who will be happy to assist.