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New insolvency provisions and the impact on suppliers

View profile for Tracey Dickens
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New insolvency provisions and the impact on suppliers

This Act came into force on the 26 June 2020. The Government has been looking at amending the Insolvency Act 1986 (“1986 Act”) for some time now.

Following the acceptance that the world was facing a pandemic, the Government announced it was bringing forward legislation for new measures to aid restructuring of companies and would provide breathing space to businesses to enable them to continue trading and avoid insolvency.

The Act introduces and extends various measures within the 1986 Act, including the introduction of a new short-term suspension. The provisions apply to the whole of the United Kingdom. However, the focus of this article is on the impact of the Act’s provision on suppliers.

Affect on suppliers seeking to rely on contractual termination provisions

Section 14 of the Act introduces a new section 233B into the Insolvency Act 1986. Section 233B applies where a company becomes subject to a relevant UK law insolvency procedure, including a new moratorium. Note, therefore, non-UK companies will not have the benefit of these provisions.

The measures restrict a supplier’s ability to terminate contracts and crystallise exposures against a company that has entered a relevant UK insolvency procedure. 

The Act disapplies the rights of a supplier to terminate a contract or do "any other thing" (e.g. amending payment terms) due to a company's insolvency. This means that subject to certain exceptions, suppliers will need to continue to supply goods or services to an insolvent company, even when that supplier may be owed significant sums of money by the insolvent company prior to the insolvency event. 

The restrictions will apply to companies which:

  • enter into administration
  • are subject to a CVA (Company Voluntary Arrangement)
  • enter into liquidation; or
  • are subject to the new statutory moratorium process and other prescribed insolvency procedures

When a company becomes subject to a relevant UK law insolvency procedure any automatic termination clauses or clauses based on past breaches of the contract will become ineffective. This means that while the company is subject to a relevant UK insolvency procedure, the Act prevents the exercise of any termination rights or other rights that arose before such insolvency procedure commenced. 

Therefore, a supplier would not be able to rely on increased payment provisions or retention of title provisions for any breach that arose before the UK insolvency procedure. Essentially once a company is subject to a UK insolvency procedure:

  • Creditors cannot apply to the court to enforce their debt;
  • Creditors cannot commence insolvency proceedings;
  • No steps can be taken to enforce security or repossess hire-purchase goods (without court consent);
  • No proceedings or other legal processes (except certain employment claims) can be commenced or continued without court consent;
  • Landlords cannot forfeit leases without court consent; and
  • No security can be taken over the company’s property (without the insolvency office holder’s consent).

Safeguards for suppliers

The prohibition only affects the termination provisions of the contract that apply upon a company becoming subject to a relevant UK insolvency procedure.

There are other limited circumstances where a supplier to a company that has entered a relevant UK insolvency procedure may terminate the contract:

  • if the relevant insolvency office-holder or company consents; or
  • by application to the court. This is to be relieved of the requirement to supply if a supplier can demonstrate that the continuity of the contract would cause financial hardship. This application would also be needed to enforce any retention of title rights within the supply contract arising prior to the UK insolvency procedure.

Please note a supplier still has the right to terminate the contract on other grounds provided by the contract including:

  • non-payment for supplies made following the insolvency trigger;
  • for breach of the underlying contract (e.g. breach of health and safety requirements) excluding provisions relating to their financial position or entering an insolvency procedure; and
  • giving notice in accordance with the contract terms or expiry of the contract term.

Once the agreement has terminated for any of these reasons then it is expected a supplier should be able to rely on any right of lien or retention as normal.

 

Things to consider

You need to consider whether your current supply terms put any additional barriers in the way of terminating the contract when permitted to do so. Consider including provisions that ensure your ability to pursue all debts, including those arising before the UK insolvency procedure, and rely on security and retention of title at the time of termination.

Exclusions

The Act creates a new schedule to the 1986 Act excluding certain companies and services from the Act’s provisions. These are mainly financial services and essential services excluded by existing provisions of the 1986 Act such as insurance companies and banks.

 

Small supplier temporary exclusion

Small entities are exempt from the new provisions until 30 September 2020 (although that expiry date may be extended or reduced). A small entity meets at least two of the following conditions during its most recent financial year:

  • the supplier’s turnover was not more than £10.2 million
  • the supplier's balance sheet total was not more than £5.1 million
  • the number of the supplier’s employees was not more than 50

 

If you need any guidance for your company, please contact our Business team. I am based in our Colchester office and can be contacted on 01206 217326 or tracey.dickens@birkettlong.co.uk.

 

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