June's Senior Counsel session welcomed insolvency specialist: Edward Crossley of 4 Stone Buildings Chambers, acting as expert guide through the labyrinth of various problems that can arise for suppliers of goods and services during the high-pressured event wherein a trading partner becomes insolvent.
The Corporate Insolvency and Governance Act 2020 (CIGA)
Upon speaking to a multitude of in-house lawyers, Edward came to the stark realisation that there exists a significant lack of awareness of The Corporate Insolvency and Governance Act 2020 (CIGA) and its wider impact.
CIGA came into force as a consequence of the Pandemic in 2020 and introduced an array of temporary measures designed to provide relief to businesses and individuals during this time, however all of these have now expired. The Act also introduced three permanent measures with the intent to relieve the burden on businesses in financial difficulty. Edward expanded on this by clarifying that these permanent measures included; a new restructuring plan procedure; a new statutory moratorium; and a new provision to protect a business’ supply contracts in the event of insolvency. Edward noted that it is this final measure that ratifies the insertion of section 233B into The Insolvency Act 1986 and allows CIGA to remain largely undetected.
The Insolvency Act 1986 s.233B
Edward highlighted the importance of understanding the various different effects of this section and the powers that it grants.
The first notable effect is contained within s.233B(3) in that: where an entity becomes subject to a formal insolvency procedure; a supplier cannot terminate a supply contract or do any other thing because of that insolvency. It must further be highlighted that there are exceptions to this rule, which include; if the office holder (eg administrator, liquidator) agrees to termination; if the insolvent company itself agrees to termination; or if the permission of the court is granted in the event of ‘supplier hardship’. On the final exception, Edward noted that presently there exists no particular examples of case law that directly clarify the definition of ‘supplier hardship’ but suggested that the words, as they are presented, are likely to be relatively self-explanatory. Alongside these exceptions, suppliers of goods and services, for goods and services supplied during the insolvency process, will generally benefit from a higher payment priority. Debts generated during said insolvency process, such as the continued supply of goods and services, will usually be treated as an expense of the process and those expenses are then paid in priority to most other debts. Despite the above exceptions and ‘payment sweetener’, Edward made certain to showcase the fact that this process remains a ‘scary’ scenario for suppliers involved. This is due to the fact that statute expressly overrides any potential contractual termination agreement that may have been formulated between parties.
The other significant effect of s.233B is that: where an entity becomes subject to a formal insolvency procedure; a supplier of goods and services cannot make it a condition of continuing to supply that any outstanding payments are paid. This means that a supplier cannot demand the payment of any aged debts from the customer and can therefore cause significant issues for suppliers who find themselves in this situation.
What can a supplier do to limit difficulties caused by CIGA?​
As Captain of the legal lifeboat for suppliers of goods and services, Edward offered several solutions to mitigate the previously outlined negative effects of CIGA. The first and most important suggestion was to undertake a wholesale contract review with CIGA in mind. Edward highlighted that there are a number of actions that a supplier can take to protect itself, including:
Edward recognised that, whilst these are all effective protections, they may not be available for suppliers with a pre-existing contract. In light of this, he suggested three other solutions that may offer an alternative lifeline:
The big picture
As Edward shepherded the talk towards the finishing line, he expressed his desire for suppliers of goods and services, and legal professionals alike to heed the following key points:
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