- Corporate Insolvency and Governance Bill: Impact on supply contracts
Corporate Insolvency and Governance Bill: Impact on supply contracts
Corporate Insolvency and Governance Bill: Impact on supply contracts9th June 2020 - Published by Kuits commercial team
The Corporate Insolvency and Governance Bill (the bill), introduced by the Government on May 20th provides for amendments to the Insolvency Act 1986 and the Companies Act 2006 and is making its way through the legislative process at a pace in response to the COVID-19 pandemic (COVID-19).
Businesses across many sectors have been disrupted and some devastated by COVID-19 and the Government has taken a variety of measures to help reduce the permanence of the damage caused to those businesses, and in turn to the economy.
The bill attempts to grant businesses some time and space to recover by introducing a new moratorium process. However, the bill also contains provisions which impact suppliers by limiting their previous contractual entitlements to terminate. Whilst some provisions of the bill are effective temporarily, those affecting termination of supply contracts are permanent.
Impact on Supply Contracts
The provisions affecting termination in supply contracts in particular are contained in sections 12-17 of the bill, and provide for the following:
- Where a customer company enters in to a formal insolvency process (see below for more), a contract provision entitling a supplier to cease supplying goods or services or terminate the contract simply because of an insolvency process will be ineffective.
- If a supplier had a right to terminate for an event which occurred prior to the insolvency process (say, non-payment of invoices) then once the customer company has entered the insolvency process, this right can no longer be exercised either.
- Suppliers will also be prevented from making payment of outstanding charges a condition of any continued supply.
A number of qualifications apply, meaning a supplier can still terminate if:
- An administrator, administrative receiver, liquidator or provisional liquidator appointed over the insolvent company agrees.
- In the case of a moratorium, CVA or Part 26A plan, the customer company agrees.
- The court grants permission, being satisfied that the continuation of the contract would cause the supplier hardship.
There are also specific exceptions related to:
- Financial services;
- Public-private partnership project companies; and
- Utilities, communications and IT service providers (which are already covered by provisions of the Insolvency Act 1986)
Measures for small suppliers
Specific measures for small suppliers mean that these companies will be exempt from the provisions in the temporary period and can rely on the insolvency clause in the contract to terminate early.
The provisions state that a supplier is small if, in its most recent financial year, at least two of the following three conditions were met:
1. The supplier’s turnover was not more than £10.2 million; and/or
2. The supplier’s balance sheet total was not more than £5.1 million; and/or
3. The average number of the supplier’s employees was not more than 50.
Which events trigger these provisions?
The relevant insolvency events which trigger the application of these provisions are:
The new statutory moratorium (which we covered here) administration or the appointment of an administrative receiver, a CVA, liquidation or the appointment of a provisional liquidator, or where a court orders meetings to vote on a new Part 26A plan
On 3 June 2020, the bill completed all its stages in the House of Commons and has now gone to the House of Lords for consideration.
A second reading in the House of Lords is expected for 9 June, or a second and third reading on 23 June.
If you would like advice around your supply contracts and the impact the bill could have, please contact Caroline Brennan on 0161 838 8195 or email email@example.com