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Corporate Insolvency and Governance Act – Supplier Terms

31 July 2020

On 26 June 2020 the Corporate Insolvency and Governance Act (CIGA) came into force. The CIGA has made both permanent and short-term changes to the insolvency regime in response to the coronavirus pandemic and its consequences.

Why does it matter?

One of the permanent reforms provides that a contractual term of a contract to supply services or goods will be ineffective if:

  • it terminates or entitles the supplier to terminate the supply; or

  • does “any other thing”, such as amending payment terms or requiring a company to pay outstanding charges as a condition of them continuing the supply (therefore preventing the demand of ransom payments), because the company has entered into insolvency. 
These clauses can be referred to as “ipso facto” clauses, which translates to ‘by the very fact’ and relates to situations where a party seeks to terminate a contract by the very fact of insolvency.

Supply of goods or services contracts invariably include a right for the supplier to terminate in the event of the customer’s “insolvency”. What constitutes “insolvency” for those purposes will be a matter for negotiation between the parties. It will usually be in the supplier’s interest to define “insolvency” so that it can be triggered by events that indicate financial distress which arise well before the customer enters into any formal insolvency process, such as administration or liquidation. Conversely, the customer will want as late a trigger as it can obtain. 

There is a tension between the supplier’s need to protect itself against non-payment and a customer’s need for continued supply to continue trading and avoid formal insolvency. Historically only a specific set of suppliers, such as those providing utility and IT services, have been prohibited from stopping supplies due to customer’s formal insolvency and where their supplies continue to be paid for. 

The CIGA now prohibits all suppliers from: (i) stopping supplies by reason of a customer’s insolvency if the supplies continue to be paid for, (ii) amending the contractual terms – eg, to charge higher prices and (iii) making continued supply conditional on settlement of historic debts. This prohibition has retrospective effect so will apply to all terms currently in force as well as those agreed going forward.

Suppliers will still be able to terminate the contract:

  • with the consent of the insolvency office holder appointed over the customer
  • with the permission of the court provided the court is satisfied that continuation of the contract would cause the supplier hardship, or
  • in reliance on new breaches which happen after the insolvency procedure begins.
This new reform is of significant importance as it means that, subject to the exceptions, suppliers are required to continue to supply goods or services to an insolvent company, even when that supplier may be owed significant sums of money by the insolvent company prior to its insolvency.

What action should you consider?

The intention behind this new reform is to ensure continuity of supply and allow companies more of a chance to rescue their business. Suppliers should consider taking the following actions:

  • reviewing your customer base to assess the risk of insolvency and then actively managing exposure to those customers
  • reviewing your standard terms and conditions and consider revising them to include alternative termination rights that arise on customer financial distress but before insolvency
  • taking advice on other options to insulate from customer insolvency such as retention of title rights, pro-forma invoicing or other security/guarantee protection