Losing the right to terminate supply: the impact of the Corporate Governance and Insolvency Act 2020

This article considers the new section 233B Insolvency Act 1986, introduced by the Corporate Governance and Insolvency Act 2020.  This new section imposes harsher restrictions on a supplier, seeking to restrict them from terminating a supply contract where a customer enters an insolvency procedure.

Before we look at section 233B, the starting point is the original section 233 itself, which formed part of the Insolvency Act 1986.  This section gives only limited protection to an insolvent company.  It prevents suppliers of essential supplies only (electricity, gas, water, communication services and IT) from demanding payment of existing debts as a condition to continuing supply after insolvency, and also allows suppliers to require a personal guarantee from an officeholder in relation to ongoing supply.  There is nothing preventing termination.

Next came section 233A, introduced by the Insolvency (Protection of Essential Supplies) Order 2015, to prevent termination of those same essential supplies only because of insolvency, but only in the event of CVA or administration.  As well as being limited to CVAs and administrations, there are other areas where this section is lacking.  For example, there is nothing to stop a supplier from terminating in the run up to a CVA being entered into, or if payment becomes overdue by more than 28 days after insolvency.

The new section 233B is a major change.  For starters, it applies to all supply of goods and services contracts (with limited exclusions for certain financial services); and it applies to any of the insolvency procedures under the 1986 Act, including the new moratorium under Part A1 and the restructuring plan under Part 26A.

Section 233B makes any contract term that provides for automatic termination void, along with any term that applies a consequence to the insolvency, such as an automatic change in payment terms.  Further, a crucial point to note is that a supplier will not be able to terminate a contract because of a pre-insolvency event that is unrelated to the insolvency (such as breach of another term) unless the supplier exercised its right before the commencement of the insolvency proceedings.

There are a few unknowns and yet to be tested points, such as whether the right to terminate for repudiatory breach remains available to suppliers.  But what is clear is that it will be more important than ever for suppliers to act promptly on breach to protect their position in the event of customer insolvency.

In summary, suppliers will of course have more options available to them the earlier they act.  Pre-insolvency, they can still exercise their contractual rights as normal.  Post-insolvency, whilst ore restricted they can still terminate for breaches during that time; they could decline to provide additional supplies to those provided pre-insolvency; or they could refuse to renew supplies when contractual terms are up, to name a few examples of available options.

When drafting contracts, we expect to see shorter terms for supply contracts, or contracts structured as separate series of contracts, with tighter payment terms to allow for quicker action to be taken by suppliers.  On a practical note, suppliers would be well placed to conduct more due diligence at the outset, and may even look to insert contractual terms requiring the regular provision of financial information from the customer.

What is clear is that, rather than sitting back and waiting for something to go wrong, suppliers should be pro-active and review their contracts at this early stage.

For more information, please do not hesitate to contact Alexandra Withers on ajw@srflegal.co.uk.