The continuation of supplies during insolvency proceedings

continuation of supplies during insolvency proceedingsFollowing the introduction of the Corporate Insolvency and Governance Act 2020, Guess writer, Caroline Clark of RMCSC considers the provisions of the Act that protect the supplies of goods and services to companies that are subject to insolvency proceedings.

One major problem would be utility companies and other suppliers withdrawing their services to insolvent businesses this would and has caused untold damage to creditor interests for some time.

A number of vital business software services such as IT and accounting, in addition to energy and water supplies, are being deliberately withdrawn by providers intent on making a profit from misfortune.

What is CIGA 2020

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) is a piece of legislation which was introduced on 26 June 2020 which permanently increases restructuring options for businesses experiencing financial difficulties, and includes temporary measures aimed at easing some of the most pressing consequences businesses may be experiencing as a result of the coronavirus (COVID-19) pandemic.

CIGA 2020 contains significant reforms to the UK’s restructuring and insolvency framework, including an accelerated introduction of measures, such as the ‘company moratorium’, which had been considered for some time.

Insolvency legislation of the supply of goods and services before CIGA 2020?

The Insolvency Act 1986 (IA 1986) introduced legislation to ensure that the provision of vital utilities, gas, electricity and water would continue after a company went into liquidation, administrative receivership or administration.

Before IA 1986 suppliers of these utilities could effectively hold companies subject to an insolvency proceeding to ransom, demanding payment in full of any outstanding amounts before continuing supplies after the date of insolvency. The supply of these utilities often depended on the negotiating skills of the office holding insolvency practitioner. However, IA 1986 made it illegal for suppliers of these utilities to stop the supply or demand payment in full of outstanding amounts before continuing supply post insolvency.

The situation was amended slightly in 2015 regarding companies subject to a voluntary arrangement or in administration. In these cases, the contract of supply may be ended after administration or when entering into a company voluntary arrangement but only with the consent of the court or the administrator or supervisor. The supplier may ask the officeholding insolvency practitioner to give a personal guarantee for payment of amounts outstanding after the date of administration or after the voluntary arrangement took effect. 

Read more: What does going into administration mean

What does CIGA 2020 say about the supply of goods and services?

After 34 years when only the supply of utilities was protected after the date of insolvency, CIGA 2020 introduced legislation that made it illegal for contracts for the supply of all goods and services to be terminated because the debtor company entered an insolvency proceeding. Insolvency proceedings now include the moratorium, also introduced by CIGA 2020. Suppliers of goods and services now cannot make it a condition of ongoing supply that outstanding amounts are paid.

The contract of supply may be terminated with the consent of the officeholder or the company, in the case of the moratorium, or if the court is of the opinion that the supplier would suffer hardship by continuing with the supply of goods or services.

There is a temporary exemption for suppliers who are considered ‘small entities’. Small entities are defined as companies that meet two of the three following requirements:

  • turnover less than £10.2 million
  • balance sheet total less than £5.1 million
  • fewer than 50 employees 

These so-called small entities can terminate a contract of supply if the client company enters an insolvency procedure.

Why did CIGA 2020 change the law?

Based on experience before CIGA 2020, it seems that the requirement for ongoing supplies of goods and services after the date of insolvency would not be relevant in most cases. Ensuring the ongoing supply of goods and services after the date of insolvency is only likely to be relevant in a few insolvencies, administrations or company voluntary arrangements, where trade may continue after the date of insolvency.

The long trading administrative receiverships of the 1980s and 1990s are a thing of the past and prepack sales in administrations, where the going concern business is sold virtually immediately after the date of administration, are increasingly the norm. Having a protected supply of goods and services post insolvency is not something seen as particularly vital by the insolvency profession, so why was it introduced by CIGA 2020?

CIGA 2020 should be considered in the context of 2020; the COVID-19 pandemic, the lockdown and the catastrophic impact these events have had on the economy. At the time that CIGA 2020 was being drafted and rushed through parliament in May and June 2020, the government was predicting a short lockdown leading to a relatively short crisis in trade, followed by an equally swift and strong recovery throughout the economy.

The moratorium was introduced to give a breathing space to companies experiencing financial difficulties so that they could hang on until the decisive recovery in the economy – and the protection of supply of all goods and services during the moratorium would be of great practical help in this situation.

So, the protection of the supply of goods and services could be very relevant for companies entering into a moratorium. It seems, however, that very few companies have so far entered into a moratorium and that the financial difficulties now experienced by many sectors cannot be solved merely by achieving a breathing space from creditors.

Practical considerations going forward?

Insolvency practitioners are considering how the legislation introduced by CIGA 2020, including that protecting the supply of goods and services, can be used to benefit creditors. The protection of the supply of goods and services may seem in theory only to be relevant for a company subject to a moratorium, but the legislation is drafted to include all types of insolvency procedure.

‘Goods and services’ are not defined in CIGA 2020 and it has been pointed out that it would be very useful if the provision of premises by a landlord was included as the provision of a service that could not be terminated on the event of a company entering into an insolvency procedure. It would take imagination and a skilled legal team to claim this successfully, but this is the type of challenge that could appeal to many in the insolvency profession.

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.