As a result of the Corporate Insolvency Governance Act 2020 (CIGA) coming into force at the end of June, existing protection for customers in relation to the supply of goods and services has been greatly extended and now means that suppliers will not be able to terminate supply contracts or impose other conditions during after a “relevant insolvency procedure” commences. Previously, protection was only in place for the supply of “essential goods and services” but now under CIGA, this protection is extended to virtually all contracts for the supply of goods and services, with the one major exception being financial services.
The effect of the new CIGA rules
During the “insolvency period”:
- any term allowing the supplier to terminate for insolvency no longer has legal effect;
- any term allowing for “any other thing” to occur or allowing the supplier the right to do “any other thing” as a result of the insolvency no longer has legal effect;
- the supplier may not terminate the contract for any reason where a termination right was not exercised before the relevant insolvency procedure arose; and
- the supplier is prohibited from making continued supplies conditional upon any outstanding charges being paid for services before the insolvency period.
These changes to the law have permanent effect and have a major impact on both customers and suppliers alike.
Under the new rules, “relevant insolvency procedure” means all traditional forms of insolvency procedure and the new moratorium powers which directors have under separate provisions of CIGA. Another key term is “insolvency period”, as this is the period when the new rules apply: it is simply defined as beginning at the start of a relevant insolvency procedure and ending when the procedure ends or the relevant insolvency practitioner leaves his/her office.
The number of exceptions to the new rules is very limited and so termination will now only be allowed to occur for insolvency during the insolvency period where:
- the customer or the insolvency practitioner consents; or
- a court grants permission on the basis that continuation of the supply contract would cause the supplier “hardship” (not defined).
Tips and advice
Notwithstanding the new rules, customers need to ensure that their supply contracts still retain termination clauses for insolvency as their right to terminate for supplier insolvency is unaffected and they should also ensure that they do not give a supplier a new non-insolvency right to terminate that arises after the start of the relevant insolvency procedure, for example, non-payment in relation to continued supplies of goods or services, as the supplier can still terminate in this circumstance.
The new rules are more of a challenge to suppliers and they will need to ensure that:
- they are more vigilant than ever in monitoring the financial position of customers and be prepared to terminate early before any relevant insolvency procedure begins;
- the contract has termination rights for non-insolvency reasons, such as non-payment, which may be used during the insolvency period;
- customers promptly provide any security required as it will not be possible to terminate for a breach of this provision after the rules come into effect; and
- supply contracts allow for advance payments and/or shorter invoicing periods and that each supply is subject to a new, separate order rather than being seen as a single continuous supply obligation.
Whilst CIGA has been introduced to protect customers in the supply chain, it remains to be seen whether the harsh consequences for suppliers may lead them to being more likely to trigger termination rights sooner than would otherwise have been the case in order to avoid being prohibited from terminating after the relevant insolvency procedure starts.