Whilst the temporary reforms consist of measures to prevent an otherwise viable business from entering insolvent liquidation by virtue of any financial effect of the coronavirus pandemic, the permanent reforms have been in the pipeline for longer. One of the most significant permanent reforms are to suppliers’ rights when their customers enter into an insolvency process.
The changes to a supplier’s rights when faced with an insolvent customer
A supplier of goods or services to a company in a formal rescue or insolvency procedure is now restricted in its ability to terminate the supply contract. If a recipient of the supply enters into a relevant rescue or insolvency procedure, any clause which would allow the supplier to terminate the contract, or which automatically terminates the contract, is void.
Clearly, such restrictions are designed to compel the continuation of a supply to a customer in order to aid the rescue of the customer company where possible. It would be much more difficult to achieve the rescue of a viable business if its suppliers were able to terminate their supply the moment it sought the assistance of a formal rescue or insolvency procedure.
The reforms do not stop at restricting the supplier’s ability to terminate the supply contract. There are restrictions also on any contractual rights a supplier may have to “do any other thing” by virtue of the customer entering into a relevant insolvency procedure. This would catch, for example, amending payment terms.
There are exceptions to these restrictions, some of which are temporary (for example, small suppliers are excluded) and others are permanent exceptions such as, being able to terminate with the court’s or insolvency office-holder’s consent or if an event of default occurs within the insolvency period, such as non-payment.
It is also worth pointing out that where a company has entered an insolvency procedure such as administration or liquidation, the ongoing continuation of supply is likely to be paid as an expense of the administration or liquidation, which ranks ahead of other creditors. This does not apply to arrears which relate to the period before the insolvency procedure however.
These changes to suppliers’ rights are modelled on existing legislation which relates to the supply of what is deemed “essential” (broadly, the supply of IT, utilities and communication services). This, in effect, allows an insolvency office-holder (such as an administrator or liquidator) to compel the continuation of the supply and prevent an insolvency-related termination. Further, as with the provisions introduced for supplies generally, the continuation of supply cannot be contingent upon payment of historical arrears that have accrued pre-insolvency.
Consequences for the supply chain
The restrictions to suppliers’ rights are likely to be viewed with alarm by suppliers who are now unable to exit a situation where a customer has entered into a formal insolvency procedure. The restrictions are likely to cause many suppliers to review their standard terms and conditions and possibly attempt to renegotiate them so that they are able to foresee financial red flags quickly and prior to a formal entry into insolvency. That way, they will still be able to utilise any termination rights at their disposal.
There is also likely to be wider reviews by companies of their own supply chains, both above and below, to identify those suppliers which the chain is heavily reliant on so it can assess its vulnerability in the event of a company within the chain entering into an insolvency process, albeit these restrictions are also likely to assist the maintenance of that supply in certain circumstances.
Whilst the ongoing coronavirus pandemic has undoubtedly made trading conditions difficult, the restrictions are clearly aimed to support the concept of the rescue of a company which is facing financial difficulties. Whilst a supplier’s first instinct when it hears of an insolvent company may be to cut ties, supporting a company’s rescue by continuing the supply will possibly save the trading relationship and give more chance to the rescue being successful.
This article was written by Jordan Cooper, associate at international law firm Bird & Bird
