By Linda Crow
The new Corporate Insolvency and Governance Bill will introduce new provisions to protect a company from suppliers wishing to terminate supply contracts or invoking more draconian terms when the company is entering into certain insolvency procedures, a CVA, or a new restructuring plan or moratorium (as introduced by the Bill), (each an “Insolvency Procedure”).
The purpose behind the new provisions is to maximise the possibility of a company being rescued or being able to sell its business as a going concern by helping it to trade through an Insolvency Procedure.
Where a company (the customer) becomes subject to an Insolvency Procedure, the supplier will be prohibited from:
- Relying on a clause in a contract for termination of the contract, or termination of supply under it, “or for any other thing which would take place” (for example increasing the price of supplies), which automatically triggers because the company becomes subject to an Insolvency Procedure.
- Relying on clause in a contract that permits it to terminate the contract, or terminate the supply under it, or to do any other thing because the company becomes subject to an Insolvency Procedure.
- Relying on an event that occurred before the Insolvency Procedure that would have allowed it to terminate a contract or supply under the contract, to terminate whilst the Insolvency Procedure is ongoing.
- Directly or indirectly making the further supply of goods or services dependent upon payment of any outstanding charges arising before the Insolvency Procedure.
A supplier can seek relief from the new provisions and seek termination of the contract by:
- Getting the consent of the relevant office holder (not applicable to a moratorium, voluntary arrangement or restructuring plan);
- Where the company consents to the termination when it is subject to a moratorium, voluntary arrangement or restructuring plan;
- Where, on an application, the Court grants permission because it is satisfied that the continuation of the contract would cause the supplier hardship.
There are temporary exclusions (from the date the provisions come into force to the date falling one month after the provisions come into force, to cover COVID -19 disruption) for the supply of goods and services by suppliers which are categorised as small entities at the time a company becomes subject to an Insolvency Procedure. To qualify as a small entity, a supplier must satisfy at least two of the following conditions in relation to its most recent financial year:
- Turnover of not more than £10.2 million;
- Balance sheet total (aggregate value of assets) of not more than £5.1 million;
- Average number of employees being not more than 50.
The new provisions do not apply to supplies covered by the prohibitions already contained in the Insolvency Act 1986 (as amended) being broadly supplies of:
- Communications services
- Point of sale terminals
- Computer hardware and software
- Advice and technical assistance in connection with the use of information technology
- Data storage and processing
- Website hosting.
In addition, the new provisions will not apply in relation to:
- Any contract between a supplier and a company where one or both of those parties carries on one or more of a broad range of specified financial services, seemingly whatever the nature of the goods or services being supplied under the contract; or
- Any contract involving the supply of certain specified financial services.
The new provisions contain some wide and loose wording by the use of “any other thing”, which may lead to some problems of interpretation. In addition, in practice suppliers are likely to exert whatever commercial pressures they can to ensure that they are not out of pocket, particularly as there are generally plenty of warning signs before a company is subject to an Insolvency Procedure, and therefore before the new prohibitions take effect.
The Bill provides the Secretary of State with wide powers to amend the new provisions on a temporary or permanent basis.
The Bill has completed its second and third readings in the House of Commons with minimal amendments. The Bill should have completed all necessary procedures for it to come into force by the end of June 2020.
For More Information
For more information on the matter raised in this post, please contact Linda Crow or another member of the Duane Morris London Team.