Proposed new laws preventing suppliers terminating contracts
James Sarjantson
Contracts, Technology, Digital & Intellectual Property Solicitor & Partner at LCF Law
The Corporate Insolvency and Governance Bill has been published and is being rushed through the legislative process by the Government as part of its measures to alleviate the effects of the Covid-19 Pandemic. The bill includes new insolvency processes, but significantly also includes new provisions restricting the ability of suppliers to terminate contracts or cease supply.
What is changing?
The new provisions mean that when a company goes into a formal insolvency process, a supplier to that company is not entitled to cease supplying goods or services under their contract simply because of the insolvency process. Contract terms that attempt to permit this are invalid.
Where the supplier was entitled to terminate the contract or supply before the company went into an insolvency process, because of an event occurring before the insolvency process, the supplier cannot then exercise that termination right once the company is in the insolvency process.
Exceptions
There is an exception where either the company’s administrator (or other insolvency practitioner) agrees, or a Court (being satisfied that the continuation of the contract would cause the supplier hardship) grants permission – Although of course that involves the cost, time and uncertainty of an application to Court.
There is also a temporary exception for “small entities” who have supplied to a company that has gone into a formal insolvency process at the relevant time. A small entity is one who (if it is not in its first financial year) satisfies at least two of the following conditions:
(1) turnover of not more than ￡10.2 million;
(2) balance sheet total of not more than ￡5.1 million;
(3) no more than 50 employees.
It is also worth noting that a supplier cannot demand payment of outstanding pre-insolvency charges as a condition of continuing supply.
Whilst this is only a bill at this stage, it will shortly become law in some form or other, and will no doubt cause hardship for (solvent) suppliers, in the name of helping (temporarily insolvent) customers.
Head of Corporate at LCF Law
4 年Thanks James. It may assist more rescues if administrators can keep the business trading in the short term. Trouble is there is always a fairness balance with these things which will shift.Also suppliers need to ensure that their contracts as expressly non- assignable without consent if they have the negotiating power so they don’t get “sold” if the business is sold out of insolvency.
Contracts, Technology, Digital & Intellectual Property Solicitor & Partner at LCF Law
4 年Insolvency lawyers will take a different view on this. I do get what the legislation is trying to achieve, but it will cause some hardship. However it is important to note that if there is continued supply, and the (insolvent) business doesn't pay for those supplies after falling into the insolvency process, then a contractual termination right for non-payment can still be enforced - it is just that falling into the insolvency process in itself will not be allowed to trigger termination.
Over two decades advising on mergers & acquisitions covering all industries; specific interest in pharmacy sector. EOT Independent Trustee
4 年I rather suspect the legislation whilst well meaning is commercially naive. What supplier is going to want to continue providing services or goods if they at a high risk of not being paid? And if the struggling business eventually folds, who is going to want to go to the expense of enforcing these rules. I think there will be an urgent need for businesses to adjust/review their supply terms in order to give themselves the maximum flexibility in light of these potential changes.
Head Of Buying & Brand Communication at Skopes
4 年Interesting James.. whilst sympathetic to the aims of helping keep businesses afloat especially during such unprecedented times, it does seem against the principles of fairness and the free market