Our previous article on the Corporate Insolvency and Governance Act 2020 (the “Act”) sought to provide an overview of the relevant provisions in the insolvency context.
This article seeks to look at the impact of the Act in relation to supply contracts more specifically and set out the practical considerations for suppliers moving forward.
Following the implementation of the Act, a termination clause that would usually entitle a supplier to terminate a supply contract or to suspend performance on the insolvency of the buyer, is unenforceable (unless an exception applies). In other words, a supplier will need to continue to sell its goods to an insolvent buyer. A supplier will also lose the right to terminate the contract that previously existed prior to the insolvency procedure.
Under the provisions of the Act, any debt incurred post-insolvency should be repaid and will be treated with super-priority in the insolvency process. However, the supplier may not receive payment for these debts until 12 weeks after the end of the moratorium. For the avoidance of doubt, debts incurred before the insolvency will not be covered and will be treated as a normal unsecured debt.
Exceptions for which suppliers will still be able to terminate contracts include situations where a new breach of contract has occurred after the insolvency procedure begins, with the permission of the insolvency office holder and with the permission of the court provided that it can be satisfied that the continuation of the contract would cause hardship upon the supplier.
Suppliers will need to be even more diligent than ever to ensure that they are comfortable with the buyer’s creditworthiness. The following methods can provide for some degree of additional security for payment:
- Requiring payments in advance or a sizeable deposit before the start of the contract. In situations of ongoing supply, it is worth suppliers seeking a deposit fund which is consistently kept topped up.
- Incorporating a retention of title clause in the standard terms for supply. Care should be taken to ensure the clause and terms are enforceable and binding upon buyers. It is also critical that they are enforceable and enforced before the buyer enters into an insolvency procedure.
- Requiring the buyer to provide a bank guarantee or performance bond.
- Including an obligation in the contract on the buyer to provide regular financial information to enable the seller to assess its continued solvency. The scope of the obligation could depend on the level of supply being provided.
- In certain circumstances, the supplier can rely on a lien over the goods/property supplied.
As a general proposition, suppliers will need to be extremely alert to terminating the supply agreement, in accordance with the terms of the contract, before the buyer enters into an insolvency procedure.
Whilst similar provisions to the provisions of the Act which affect supplier contracts already exist in countries such as the US, Germany, Italy and Australia, it will certainly be interesting to see how relationships and contracts between suppliers and buyers are affected by these changes.
If you have a query or seek assistance in relation the insolvency aspects of the above, please contact our Insolvency Team, for ongoing or potential commercial disputes, our Commercial Disputes Team and to be pro-active in protecting yourself as a relevant stakeholder, our Corporate and Commercial Team.
Posted on July 16, 2020