How will the UK’s new Insolvency law affect suppliers?

The Corporate Insolvency and Governance Act 2020 (the "Act") received Royal Assent on 25 June 2020 and came into force on 26 June 2020. It represents a major change to UK insolvency law. There are a number of aspects of the Act that may present additional challenges for suppliers of goods and services and it is important to note that, although the Act does contain some temporary COVID-related amendments, many of the provisions affecting suppliers are permanent changes that have been under consultation since 2016.

Here we summarise some of the key provisions affecting suppliers of goods and services.

Rights to terminate for insolvency void

Perhaps the most major change for suppliers is that they will no longer be able to rely upon a right to terminate contracts in the event of insolvency or an insolvency process. There has been a ban on essential suppliers exercising contractual rights to terminate in some insolvency situations since 2015 but this is now extended, subject to specified exemptions, to all suppliers, all contracts (regardless of date) and all types of insolvency process (section 14 of the Act).

The Act contains some protections for continuation of supply to an insolvent customer including:-

• Termination can be consented to by the insolvency officeholder.

• If continuing supply will cause "serious hardship" to the supplier, it can apply to court for permission to terminate (this test is not clearly defined and its application may largely be limited to circumstances where the supplier's own solvency is threatened or perhaps where the supplier would have to expend significant costs to continue to supply which it might be unable to recover).

• If supply continues post-insolvency and that supply is not paid for, the right to terminate for that post-insolvency breach will not be lost.

In terms of exemptions:

• these provisions won't apply to contracts for financial services or where the supplier or company is an investment bank or firm (see our article on these exemptions here).

• Small businesses are temporarily exempt - small businesses being defined as a business which meets two of three of the following criteria for the last financial year:

  • A turnover of less than £10.2m;
  • A balance sheet value of less than £5.1m; and
  • An average number of employees fewer than 50.

Other rights linked to insolvency also void

Suppliers will also not be able to rely upon other rights to the extent that those are triggered by insolvency (e.g. price rachets, acceleration of payment of outstanding invoices).

In this context, it is important to say that the Act contains no ban on the enforcement of retention of title clauses ("RoT") clauses per se. A RoT clause specifes that the ownership of goods delivered does not pass until payment is made. However, as explained below, such clauses cannot be enforced during an administration (as before) or in the course of the newly introduced moratorium. RoT clauses can be a very important tool for suppliers in the event of an insolvency.  Although there is no specific change here, aspects of a RoT clause, depending on how widely they are drafted, could be affected by the Act if they give the supplier an entitlement linked to an insolvency event.

Loss of termination rights that existed pre-insolvency

If a right to terminate accrues pre-insolvency (e.g. for non-payment) a supplier now loses the right to rely on that termination event post-insolvency. This means that suppliers will need to monitor closely the financial position of customers and quickly decide how to proceed where a right of termination arises.

Suppliers' Window of Opportunity?

In relation to the loss of certain contractual rights upon insolvency, it should be noted that such rights are only lost when the company actually becomes subject to the relevant insolvency procedure (i.e. when a winding up order is granted, or when the company enters into the moratorium or administration). If a supplier receives information about a winding up petition having been filed or a notice of intention to appoint administrators, a supplier's right to terminate (for example) could still be exercised at that point - so there is a small window of opportunity here, timing being everything. That window would not however be available for the new moratorium, given the manner in which that can be commenced (i.e. without prior notice as described below).

PRACTICAL TIP: given that the supplier loses rights to terminate on entry to the insolvency procedure but not on notice of the insolvency procedure, we recommend that suppliers check their ipso facto clauses in order to ensure that rights to terminate would be triggered on receiving notice of insolvency and not just at the point of the counterparty actually entering into the insolvency process.

Temporary suspension of statutory demands and winding up petitions

Suppliers will not be able to present winding up petitions for non-payment by either (a) relying on a statutory demand served between 1 March 2020 and 30 September 2020 or (b) if the reason for non-payment or the worsening in the customer's financial position might be linked to COVID-19 (unless the relevant ground for serving the petition would have arisen even if COVID-19 had not had such an effect). This is a temporary change, only in place until 30 September 2020, although it is possible this end-date may be extended.

Aspects of the new moratorium relevant to suppliers

The Act provides for a new moratorium which can be put into place by a company's directors filing papers with the Court and which is overseen by a Monitor. It is intended only to last for an Initial Period of 20 days, but this can be extended by the directors for another 20 days, or for up to a year after the Initial Period with creditor consent or court approval. The most important points for suppliers to note about this moratorium are:

• No enforcement/legal proceedings: It will prevent a supplier bringing insolvency or other legal proceedings against the customer or its property.

• Security and RoT Clauses: It will prevent a supplier taking any steps to enforce security over a company's property and taking any steps to repossess goods in the company's possession under any "hire-purchase agreement" (which is taken to include a "retention of title agreement"), except with the Court's permission. In general, the position regarding RoT clauses in relation to this moratorium appears to be very similar to the position in an administration. One difference, however, is that the Monitor cannot consent to a supplier taking possession of goods subject to a RoT clause in the way an administrator can - court permission is required (even if the Monitor is in agreement and therefore adding to overall costs).

• Payment Holidays to suppliers: Throughout the moratorium, the company will have an automatic payment holiday for debts that became due to the supplier before the moratorium. The company may only pay sums that in total exceed £5,000 or 1% of the company's unsecured debt with Monitor Consent (and if doing so would support the company's rescue) or court approval.

• Effect of Payment Holiday provisions on suppliers: In contrast, financial services creditors and employees are not subject to a payment holiday (meaning that the company has to keep paying debts due under loan agreements for example). More importantly, if the company cannot be rescued during the moratorium and subsequently enters an insolvency process, pre-moratorium debts that were not subject to a payment holiday (i.e. the same debts due under financial services contracts) will enjoy super priority, meaning suppliers are likely to recover less in the insolvency process than they would if another insolvency process had been pursued.

What this means

As well as monitoring major customers' financial position closely, suppliers should ensure they are familiar with what rights they have in contracts that might assist in the event of a customer getting into financial difficulty. Suppliers' responses to non-payment for goods or services will need to take account of the position they may be in if a moratorium is imposed or the customer enters some other form of insolvency process.

Read our checklist of questions to consider if a supplier gets into financial difficulties and how a supplier might take steps to protect themselves in advance