The new Corporate Insolvency and Governance Act 2020 (the Act) came into effect on 26 June 2020 and makes significant changes to the UK’s insolvency laws.
It also prohibits the operation of clauses that automatically terminate supply agreements (or would entitle suppliers to terminate an agreement) when a customer company enters into a formal insolvency situation. From this point onwards, such a clause would be ineffective, and the parties would be unable to rely on it.
Prompted by the Covid-19 emergency, the main reason for the change is that such clauses often jeopardise attempts to rescue the business at risk. When a company enters into a formal insolvency situation, suppliers of goods and services often either stop or threaten to stop supplying the company (relying on terms within the supply contract to do so). This then negatively impacts the business further by hindering its ability to seek assistance. The purpose of the Act is to ensure that suppliers will no longer be able to use contractual terms to jeopardise a business rescue in this way.
Who does it apply to?
The changes apply from 26 June 2020 to suppliers that are:
- All the main incorporated forms, e.g. private limited companies
- Mutuals (including co-operatives and community benefit societies)
- Limited liability partnerships
- Other bodies and associations, whether or not incorporated
- Individuals carrying on a trade or business
There are several exclusions within the Act which apply to (i) financial services firms and contracts, (ii) public-private partnership project companies and (iii) utilities, communications and IT service providers that are already covered by sections 233 and 233A of the Insolvency Act 1996.
“Small supplier” exclusion
There is a temporary exclusion for "small suppliers” as a result of the pressures of Covid-19. If a supplier meets at least 2 of the below conditions, and suffers an insolvency event during the “relevant period” (the period beginning on 26 June and ending on 30 September 2020) it is exempt from the provisions during the temporary period and can rely on the insolvency clause in the contract to terminate supply.
Section 15 of the Act states that a supplier is “small” if, in its most recent financial year, at least two of the following conditions were met:
- Condition 1 – the supplier’s turnover was not more than £10.2 million
- Condition 2 – the supplier’s balance sheet total was not more than £5.1 million
- Condition 3 – the average number of the supplier’s employees was not more than 50
The 30 September 2020 expiry date for small suppliers is extendable in six-month blocks, and any further extension of the temporary measures requires the Secretary of State to consider it reasonable to do so to mitigate an effect of Covid-19 (section 41).
When can a supplier terminate for insolvency reasons?
The measures do not apply to termination events after an insolvency procedure has commenced. Under section 14(5) of the Act, suppliers can be relieved of the requirement to supply by agreement with the customer or office-holder, or by application to the court for permission to terminate if it causes hardship to the supplier’s business (e.g. if its own solvency is threatened).
Simply put, with the temporary exception of small suppliers, a supplier can no longer terminate a supply contract as a result of a customer entering into a formal insolvency situation which commences on or after 26 June 2020. In light of this, template contracts for the supply of goods and services may need to be reviewed to ensure that terms are compliant, and suppliers and customers will need to be aware of their termination rights.
If you have any questions in relation to the Act, or if you need any assistance with your supply contracts, please contact Lydia Loxham or a member of our Commercial team.
