The Government has now fast-tracked long-trailed changes to the corporate insolvency regime. The Corporate Insolvency and Governance Bill 2020 was laid before Parliament on 20 May 2020 and went through all the House of Commons stages in its passage on yesterday, 3 June 2020. As expected, given the Government’s majority and the impact of Covid-19 on the economy, it passed with only a few minor amendments, and is expected to complete the rest of its Parliamentary progress rapidly. It may therefore be in force by the end of this month.
Suppliers of utilities and communication services, which for these purposes include most IT services, are already used to restrictions on their ability to terminate for customer insolvency. At present, suppliers of these “essential services” generally cannot terminate a contract if the company enters administration or puts a voluntary arrangement in place. The only exceptions are if another event entitling the supplier to terminate occurs during the period of administration or voluntary arrangement, if charges for supply during the period of administration or voluntary arrangement are not paid within 28 days of the due date, with the consent of the insolvency office-holder, or with the consent of the court if continued supply would cause the supplier hardship. These suppliers also cannot require payment of outstanding charges as a condition of continued supply if a customer has entered administration, had an administrative receiver appointed, entered a voluntary arrangement, gone into liquidation or provisional liquidation or a moratorium is in place. They may however require a personal guarantee from the relevant insolvency office-holder as a condition of continued supply.
The current Bill will significantly extend these provisions. If passed as it stands:
- The restrictions will apply to (almost) all suppliers, not just suppliers of utilities, communication services and IT. There are some exceptions:
- Small suppliers do not become subject to the new law until one month after the new law comes into force; a supplier is a small supplier if it satisfies 2 of the following 3 requirements: turnover not exceeding £10.2m (or £850,00 if the business is in its first financial year), balance sheet total not more than £5.1m, and not more than 50 employees.
- Certain regulated financial services.
- Contracts subject to the existing regime for “essential services” (see below).
- Further exceptions, expressed by reference to type of supplier, contract, goods, services or in any other way, may be added later by secondary legislation.
2. The restriction on termination applies to a much wider range of insolvency events. It now applies not only if the customer enters administration or a voluntary arrangement, but also if the customer enters a moratorium (and the moratorium regime is also amended by the new Bill), has an administrative receiver appointed, or goes into liquidation or provisional liquidation, or if a court order is made for a new type of restructuring introduced by the Bill.
3. The new restrictions are more extensive:
- In addition to being unable to terminate the contract or to require payment of outstanding charges, suppliers will also be unable to exercise any other right triggered by the insolvency procedure. For example, suppliers will not be able to increase prices or the default interest rate, shorten payment terms, or reduce quantities supplied. There is also no reference to obtaining a personal guarantee of ongoing charges from the insolvency office-holder.
- Any other right to terminate arising before the customer enters the insolvency procedure will cease to apply when any of the “insolvency-related triggers” for the new regime occurs. The supplier will therefore no longer be able to exercise any contractual right to terminate for a pre-insolvency breach by the customer or a pre-insolvency change of control of the customer.
As drafted, the new provisions (like the existing restrictions on essential services) do not apply where the supplier’s right to terminate or take other action arises at an earlier stage in the customer’s financial difficulties eg when an application is made to appoint an administrative receiver, administrator or provisional liquidator, or a meeting is convened to consider a resolution for winding up, or the customer is deemed unable to pay its debts - provided that the supplier exercises this right before any of the “insolvency-related triggers” for the new regime occurs.
Suppliers may wish to deal with the risks of the new regime by ensuring that the contractual rights to terminate are triggered if events occur anticipating the customer’s insolvency (and acting swiftly if any of these events occur) – and customers will wish to guard against inclusion of these rights. Suppliers will still be able to exercise termination rights triggered by customer default etc during the insolvency period. Suppliers may want to consider other changes to their terms and conditions for new or existing contracts, such as more frequent requirements for guarantees, up-front payment or payments on account, shortening credit terms or limiting volume of supplies made on credit.
The existing regime for supplies of essential services applies to contracts made on or after 1 October 2015. The new regime will apply to all contracts within its scope, whatever their date. Any pre-1 October 2015 contracts for essential services will therefore be subject to the new regime.
As before, there are exceptions if the insolvency office-holder or customer consents to the termination or the court is satisfied that continuing the contract would cause the supplier hardship. There is no ability for the insolvency office-holder or the customer to consent to the exercise of any other contractual right which has ceased to have effect as a result of the customer’s insolvency. The Bill itself gives no guidance as to what may constitute “hardship” entitling a supplier to relief from the new regime, but the Commons briefing paper says the bar is a high one – a supplier will only be able to seek an exemption if continued supply threatens its own solvency. The prospects of rescue for the debtor company are also relevant but there’s no reference to potential impact on the supplier’s own suppliers, although vital help for one customer may have deleterious consequences not only on the immediate supplier but also further up the supply chain.
The Bill does not cover schemes of arrangement. Companies in financial difficulties who wish to take advantage of these new rules on termination for insolvency may therefore prefer to opt for the Bill’s new restructuring plan process instead – which the government has described as closely resembling existing restructuring schemes with the addition of “cross-class cramdown” provisions allowing the court to sanction the plan even if certain classes of shareholder have voted against it. Another alternative for eligible companies would be to use the new free-standing moratorium based on the US Chapter 11 procedure.
Nothing in the Bill compels suppliers to agree to the transfer of the contract, for example to a buyer of the distressed customer’s assets via a pre-pack administration or restructuring. Suppliers will therefore be free to cut their losses at this point (so long as they have not already agreed to such a transfer, as part of the underlying contract or otherwise).
Some of the changes proposed by the Bill are temporary reliefs, but the changes to termination and other contractual rights are intended to be permanent.
Please get in touch with your usual Kemp Little contact if you would like to consider any changes to your terms of business in the light of these new rules, or to discuss any of the other issues in this note.
New restrictions on suppliers’ options if their customers go into insolvency are fast-tracked with the intention of supporting business through the challenges resulting from the impact of the coronavirus and beyond