The Act introduces new measures into the Insolvency Act 1986 in relation to contracts for the supply of goods or services as follows:
- Clauses which enable a supplier to terminate a supply contract (or change other terms) upon an insolvency or formal restructuring procedure1 are ineffective.
- A prohibition on terminating a supply contract based on past breaches of the contract once the company enters an insolvency process or restructuring procedure.
This will mean that (subject to certain exclusions), suppliers will be obliged under their supply contracts to continue to supply to a customer once it enters an insolvency or restructuring process, even where there are pre-insolvency arrears. They will also be prevented from making the payment of such arrears a condition of continued supply.
The new provisions build on the existing essential supplies regime, which requires certain essential suppliers to continue to supply an insolvent company notwithstanding contractual termination rights. The new provisions will prevent suppliers of a much wider range of goods and services from relying on termination clauses or doing "any other thing" (e.g. changing payment terms) due to a company entering into a qualifying restructuring or insolvency procedure.
The relevant contract may only be terminated if the company or the appointed insolvency practitioner (e.g. if the company is in administration or liquidation) consents, or with the leave of the Court if the Court is satisfied that the continuation of the contract would cause the supplier hardship.
If the supplier's right to terminate arises after the insolvency or formal restructuring process begins (e.g. for non-payment of goods supplied after that time), then there is no prohibition on termination.
A number of types of suppliers are exempt from these measures, for example suppliers who provide financial services and those who are covered by the existing continuation of essential supplies provisions.
Suppliers which are small companies2 are also temporarily exempt in response to COVID-19 (this will apply for the period between the Act coming into force and 30 September 2020). Where a company enters into a formal restructuring procedure or insolvency after this period, small company suppliers will be affected by these provisions unless otherwise exempted.
Unlike the continuation of essential supplies regime, suppliers will not be permitted to require a personal guarantee to be provided by the office-holder or the directors as a condition of the continuation of supply.