On Wednesday 20 May, the Corporate Insolvency and Governance Bill (the "Bill") was published by the UK Government and had its first reading before Parliament. It is being fast-tracked and is expected to become law within the next few weeks.
The Bill aims to give flexibility to help struggling UK companies to react and adapt to the impact of COVID-19 on businesses and the economy. This article considers how the changes proposed in the Bill will affect termination clauses in contracts for the supply of goods and services. The new provisions include:
- A new statutory moratorium process;
- A new restructuring plan procedure;
- Provisions invalidating contractual provisions in contracts for the supply of goods and services, triggered by insolvency proceedings;
- Corporate governance provisions; and
- COVID-19 provisions, which aim to provide relief for directors and their companies from creditor action on debts due to the COVID-19 pandemic.
This article will focus on the Bill's impact on contracts for the supply of goods and services. For more information on the other aspects of the Bill, please read our summary article and review by our Corporate and Business Restructuring teams.
Prohibition of clauses permitting termination for insolvency
Until now, English contract law has generally permitted the operation of "ipso facto" clauses, which allow one party to terminate a contract if the other party becomes insolvent. As noted above, the Bill includes provisions invalidating clauses that allow suppliers to terminate an agreement in the event of customer insolvency (clause 12 of the Bill inserts the new section 233B(3) into the Insolvency Act ("IA") 1986). The insolvency procedures to which this applies are set out in this section below.
Suppliers will also be prohibited from requiring payment for past supplies as a condition for continued supply (new section 233B(4), IA 1986). This means that contracted suppliers must continue to supply the goods or services (subject to exclusions), even where there are pre-insolvency arrears.
These changes will be of particular importance to suppliers who might otherwise have been entitled to terminate supplies or impose conditions for continued supply under their contractual arrangements.
This is a novel development in English contract law as, while amendments have been made in the past to compel the continuance of certain essential supplies such as electricity, IT services and other utilities, these will now extend to contracts for the provision of other goods and services.
The relevant insolvency procedures under the new section 233B(2), IA 1986 are:
- A new statutory moratorium;
- The appointment of an administrative receiver (unless another administrative receiver was already in office);
- A company voluntary arrangement (CVA);
- The appointment of a provisional liquidator (unless another provisional liquidator was already in office); or
- The court orders meetings to vote on a new Part 26A plan (introduced into the Companies Act 2006 by clause 7 and schedule 9 of the Bill and explained in more detail here under the "Restructuring Plan" section).
Suppliers will be only able to cease supplying goods or services under the contract if:
- an administrator, administrative receiver, liquidator or provisional liquidator appointed over the insolvent company consents;
- a company consents (if subject to a moratorium, CVA or Part 26A plan); or
- the court grants permission, being satisfied that the continuation of the contract would cause the supplier hardship.
A supplier cannot demand payment of outstanding pre-insolvency charges as a condition of continuing supply (new section 233B(7), IA 1986). However, this will not apply to the ability of a utilities provider to ask the insolvency office holder to guarantee payment under section 233(2) of the IA 1986 (new paragraph 1(2), Schedule 4ZZA, IA 1986).
Exclusions also apply to certain types of suppliers including banks and insurers (set out in the new schedule 4ZZA to the IA 1986), certain types of "financial contracts" and potential set-off or netting arrangements (as defined by the Banking Act 2009).
Temporary COVID-19 provisions: exclusion for small suppliers
The Bill includes a temporary exclusion for small suppliers, which runs for one month after the Bill comes into force. However, the Bill (clause 39) allows for the extension of this period by up to another six months.
During this period, the prohibition of the termination of, or amendment to, a contract for the supply of goods or services to an insolvent customer will not apply to "small" suppliers (clause 13 of the Bill), meaning a supplier which meets at least two of the following three conditions:
- Turnover of not more than £10.2m
- Aggregate assets on balance sheet of no more than £5.1m
- Not more than 50 employees
Clause 13 of the Bill contains more detail on how these conditions will be applied.
The Bill has commenced its way through the Parliamentary process on a "fast-track" basis. MPs will consider all stages of the Bill on 3 June 2020 before being debated by the House of Lords on 9 June 2020. It may be subject to amendment and further secondary legislation is also required in certain areas. The expectation is that the Bill will receive Royal Assent before the end of June.
If you have any queries regarding the above or general contractual queries, please do not hesitate to contact a member of the Commercial team.
Authors: Hannah Nagel