Corporate Insolvency and Governance Bill: Impact of COVID-19 on supply chains
The new Corporate Insolvency and Governance Bill introduces an unprecedented level of protection to insolvent companies in supply chains. Suppliers will now be obliged to continue providing goods and services despite the fact the recipient is in an insolvency process.
The standard practice in most supply contracts is that a clause will have been agreed allowing the contract to be terminated with immediate effect upon a company’s insolvency. This is naturally a desired protection for other parties in the chain, who do not wish to be left “holding the baby” having expended money or labour with no return. In a momentous move, the Bill invalidates these clauses even in existing contracts. Suppliers will instead be obliged to continue to uphold its contractual obligations with insolvent businesses with continued provision of goods and service, even if their previous invoices remain unpaid. It is equally prohibited to seek to increase prices or rely on a guarantee once an insolvency step has been taken.
Even if a breach allowing termination existed before insolvency, a supplier will be prevented from terminating on those grounds once the insolvency steps are taken. Therefore, suppliers will need to be alive to any ongoing breaches and consider whether the extreme but pro-active step of terminating the contract is necessary. In normal times there would undoubtedly be a longer grace period, however if future insolvency appears likely, a supplier must consider what steps they can taken to avoid being tied to an ongoing contract with an insolvent party. Not all breaches will allow early termination, and suppliers should take advice on the options open to them.
This may include seeking consent from the insolvent party, or an application to the court to show that continuing the contract would cause hardship. There is also an exception for those businesses who meet the definition of small entities.
Whilst everyone can appreciate that there are benefits to preserving a supply chain to allow insolvent companies to be sold as a going concern, this does inevitably put a large and potentially unfair burden on suppliers. Many will have entered into these contracts on the basis that such a risk was contracted out – and who could have anticipated that future circumstances would result in those agreements being void?
Suppliers should therefore take stock of what risks they now face in contracts, and what steps can be taken to protect their position, including whether they would fit one of the exceptions to the Bill, terminating contracts at early stages if appropriate, costs on account, or perhaps greater caution when agreeing future contracts.
Please follow the links below to read more in our three part series about the new Corporate Insolvency and Governance Bill:
- Part 1 – Statutory demands, winding up petitions and considerations for creditors
- Part 2 – Company law in the time of COVID-19