CIGA 2020: I’m a Supplier (and my customer’s insolvent) … Get me out of here!!
In my last blog I noted the ban on terms in supply contracts for suppliers to exercise termination clauses where their counterparty to the contract enters into a formal insolvency procedure. The change, as documented in new section 233B of the Insolvency Act 1986 (IA 1986) was introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020).
It is very common in commercial contracts for suppliers to include a clause that either automatically terminates, or gives parties an express unilateral right to terminate, the contract early in certain circumstances. The list of circumstances, which usually also includes breach of contract, can be quite lengthy, with there often being a number of terms connected with insolvency
So what does new section 233B mean for existing contracts, and what options do suppliers now have in these circumstances?
Scope of the ban
The purpose of existing sections 233, 233A and new section 233B of the IA 1986 is to protect a customer’s contracts for the supply to it of goods and services if and when that customer enters corporate insolvency proceedings. This is because the existence and or continuation of such contracts is likely to make the customer company more attractive to a potential buyer, which may be the only option if the company is to continue to trade.
Sections 233 and 233A, which were already in force before CIGA 2020, gave limited protection to companies going into administration or a company voluntary arrangement (CVA), focussing on so called “essential supplies” such a utilities. New section 233B expands this protection to cover all other supplies, preventing a supplier from ceasing to supply its customer where that customer has gone into insolvency proceedings.
The important trigger event is the commencement of insolvency proceedings. This covers any insolvency proceedings under the IA 1986, including entering into administration, liquidation or a CVA, and once any such action has started, no rights of termination may be exercised even in respect of a breach that has occurred before that time.
Section 233B also prevents:
- Suppliers taking other actions as a consequence of the insolvency, such as making changes to payment terms; and
- A supplier making the payment of any outstanding sums a condition to the provision of further services (although this does not in any way relieve the customer from its payment obligations under the contract in question).
Whether the exercise of a contractual right to give notice to terminate the contract, for example, for convenience (which will be generally exercisable at any time and is not dependent on the occurrence of any particular event) is caught by the prohibition will be open to interpretation by the courts. However, the wording of section 233B does expressly refer to the occurrence of an ‘event’, which suggests that termination under any such term would not be caught.
It’s also important to note that, unlike other terms brought in by CIGA 2020, this new prohibition is permanent and will continue to apply even after any threat of the COVID-19 pandemic has passed.
Are there any exclusions?
There are some circumstances where the section 233B protection is not available:
- As noted above, the trigger event is the entry by the customer into formal insolvency proceedings, but this does not include a company entering into a scheme of arrangement, nor the appointment of a fixed charge receiver (as opposed to an administrative receiver) over the company’s assets.
- The company or LLP in question simply being unable to pay its debts, without any formal action having been taken, will not be sufficient to afford the customer this protection.
- If the company has entered into insolvency proceedings before 26 June 2020, they will not benefit from this protection.
- The ban also only applies where it is the customer who becomes insolvent, meaning customers may exercise any contractual rights of termination available to them where it is their supplier that has become insolvent.
- Certain suppliers of financial services, such a insurers and banks are not caught by the section 233B protection, and neither are individual consumers.
- There is a temporary exception to this ban for suppliers who fall within the scope of ‘small companies’ if their customer enters into an insolvency procedure between 26 June and 30 September 2020 (although this date may be subject to future change). This gives smaller suppliers time adjust to the ban as well as the opportunity to exercise their rights before the ban also applies to them from 1 October. This ban does not affect any other rights of termination in the contract.
Where contracts already include the prohibited terms, those terms will simply cease to have effect and become unenforceable and the supplier will no longer be able to rely on them. The supplier will, therefore, have to continue to provide its services unless an alternative option is available.
This protection afforded to customers makes it vital for suppliers to monitor their contracts and customers much more closely, to look out for any warning signs of impending insolvency. For example, if the supplier is aware that administrators are about to be appointed, or that a statutory demand has been served on a customer, this could be sufficient evidence of a company’s inability to pay its debts, which may constitute contractual grounds to terminate. However, any such termination rights, whether arising from an insolvency related event or other breach of contract (such as late/non-payment) must be exercised before the customer actually enters insolvency proceedings. Once it has done so, it’s too late for the supplier to take any further action
That said, there may be other options open to suppliers -
- As noted above, customers companies still have an obligation to pay their invoices for the goods and services received. There may be grounds to terminate for non-payment after the insolvency proceedings have begun.
- Any contractual terms for termination by notice (which is not event driven) will likely still be effective.
- If the contract was for particular goods or services, the supplier is at liberty to decline to provide new goods and services.
- If an existing contract term requires renewal at or around the relevant time, there is no obligation on the supplier to agree to such renewal.
- Negotiate with the appointed insolvency practitioner, who will be empowered to consent to the termination of the contract. An application can also be made to court for termination of the contract, on the grounds of hardship.
If you have any questions about the validity of your current contracts, and how they may be updated to take account of the latest changes, please contact our Head of Corporate, Liz Barton at email@example.com or +44 (0)20 7778 7238.
The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.