Suppliers use various techniques to protect themselves in the event of a corporate purchaser’s insolvency. This will include retention of title as well as the option of terminating the supply of goods or services in the event of a customer’s insolvency. More often than not, such provisions will be contained in the supplier’s terms and conditions of business which, if correctly incorporated, will govern the party’s contractual relationship.
The Corporate Insolvency and Governance Act 2020 (CIGA), operable from June 2020, significantly curtails a creditor’s right to terminate a contract on the grounds of a corporate purchaser’s insolvency. So the question will be: what will a supplier be able to do to safeguard their position?
CIGA’s rationale is to ensure that once a company enters an insolvency process, they will still be assured of continuity of supply. Accordingly, if the company is still receiving essential supplies, such as basic utilities, it will be better placed to successfully emerge from insolvency (actually, utility supplies are a good example as there already was an obligation “not to pull the plug” contained in pre-CIGA insolvency legislation).
Essentially, CIGA’s provisions state that a supplier of goods and services is unable to terminate a contract or from ‘doing any other thing’ on the grounds of a customer’s insolvency. This also applies to an attempt to terminate a contract on the grounds of a pre-insolvency breach in the event of this not being exercised before the insolvency there are some limited exceptions to these provisions which are not explored here).
While existing insolvency legislation already contains provisions to ensure continuity of essential supplies, such as utilities (already mentioned), communications and IT supplies, CIGA extends the application and hence protections to virtually all goods and services. The Act’s provisions are activated once the company is subject to a “relevant insolvency procedure”. While there are limited exceptions, such as land transactions and financial services, all other supply contracts are affected.
How can suppliers protect themselves?
It will probably be a good idea if suppliers adopted a two pronged approach .Firstly, they should consider adapting their terms and conditions of business to give them additional remedies as soon as the defaulting purchaser company experiences financial difficulty. Secondly, they should “actively credit manage” their customers. If they do this then they will be well placed to be alerted as soon as the purchaser experiences these difficulties. Suppliers may want to consider:
As a creditor what you want to do is have provisions entitling you to certain rights prior to an “insolvency event” taking place. Consider adding to the contract terms that in the event of a new judgment being registered this will entitle you to terminate the relationship at that point, save for payment terms, retention of title and other vendor protections still being kept extant. Also have in situ a provision entitling you to terminate the contract and to withdraw the supply of any further goods or services. If your contract entitles you to do this then you will not be caught up in a CIGA “insolvency event” which will otherwise prevent a creditor from achieving this.
CIGA’s debtor protections do spell a certain danger for unwary creditors. However more judicious suppliers should be able to adjust their business terms to give them the option of terminating a contract prior to an “insolvency event”. They will not be able to do this once their customer is subject to an insolvency process.
If they adopt this approach along with “active credit management” they will be better placed to adapt to the changing landscape.
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