Suppliers beware: Customer insolvency no longer means you can cease supply
Last month the Corporate Insolvency and Governance Act (CIGA) became law. It was rushed through parliament during the COVID-19 pandemic without much publicity, but has a significant impact on suppliers if their customers go into a formal insolvency process; and one which may impact of the business, and viability, of the supplier itself.
Why is it relevant to suppliers?
One key thing CIGA introduced means that a contractual term in a contract for the supply of goods or services that terminates, or entitles a supplier to terminate, on the customer’s entry into an insolvency process (commonly called ipso facto clauses) will be ineffective.
"This means suppliers will be obliged to continue supply if a customer goes into an insolvency process and unable to either demand payment of any arrears, or charge higher prices (unless the contract provides for it), as a condition of doing so."
Suppliers will still be able to terminate the contract with the consent of the insolvency office holder of the customer; if the Court is satisfied that continuation of the contract would cause the supplier hardship; or if new contractual breaches by the customer occur after the insolvency process starts.
So, what can suppliers do to protect themselves:
- consider what constitutes insolvency, and triggers termination rights, in your contracts. Insolvency for the purposes of CIGA means the customer’s entry into a formal insolvency process, and the restrictions above only bite on that event. It may be in a supplier’s interest to define insolvency widely, so that any linked termination clauses can be triggered before the customer enters into a formal insolvency process and CIGA bites;
- review your standard terms and consider whether to revise them to include alternative termination rights;
- review your customers to assess their risk of insolvency and then reduce / manage your exposure to them;
- consider including other supplier protections in your contracts / standard term, for example retention of title, pro-forma invoicing or taking security or guarantees.
Get in touch
If you would like to discuss any of the issues raised in this article, or need any advice, please contact Frank Bouette.