CIGA bitesize: Protected supplies made in an insolvency process: tips for suppliers and IPs

1. What is a supplier’s status?

Many suppliers are alarmed at the prospect of being required to continue to supply an insolvent entity pursuant to the new s.233B IA 1986 (as introduced by s14 of CIGA), particularly if already owed significant arrears.

Suppliers should be reassured that goods ordered or services commissioned and/or received during any insolvency process will be treated as an expense of that process, and in practical terms are in any case only likely to be ordered where such supply is vital to the objectives of the given process – for example to enable the company to continue to trade.

For companies subject to the new moratorium procedure, goods or services supplied during the moratorium period fall within the general exception to the payment holiday from which the company otherwise benefits (s.A18(3) IA 1986), and so fall to be settled in accordance with the normal contractual terms.

2. What happens if suppliers aren't paid for new supplies?

In administration or liquidation, expenses (such as new supplies) take priority over the office holders’ fees, so there will be a clear commercial incentive on the office holders’ part to ensure these are settled and it would be highly unlikely new supplies would have been commissioned/accepted by the office holder without sufficient funds available to pay for them.

For companies that enter administration or liquidation or propose a CVA within 12 weeks of being in a moratorium, certain debts which arose or should have been paid for during the moratorium period (being qualifying supplies, monitor’s remuneration and expenses, rent, wages or employees’ salary), will acquire priority status in the subsequent insolvency procedure (para 64A Sch B1 and s174A IA 1986 respectively, as introduced by Sch 3 of CIGA). This means that such debts are payable in priority to the expenses of the administration or liquidation, or the administrators’ or liquidators’ remuneration (other than the fees and expenses of the official receiver).

3. Top tips for suppliers

• Monitor the insolvency status of customers
• If a customer goes into an insolvency process and wishes to take advantage of the protection of supplies provisions, check the order has come from (or has been approved by) the office holder or their team
• Check if the supply instead qualifies as an ‘essential supply’ under s233A IA 1986, entitling those suppliers to enhanced protections.

4. Top tips for insolvency practitioners

• Ensure any orders for goods and services after commencement of an insolvency process are only made following an internal approval process
• Consider communicating to suppliers any changes to ordering processes - e.g. new invoice number sequencing/invoice submission procedures – to help avoid inadvertent supplies and potential arguments over priority status
• Where it becomes clear a company subject to the moratorium process will need to enter liquidation or administration, carefully assess the value of the moratorium ‘priority’ payments and how these will affect availability of realisations for remuneration and expenses.

For more information about this article, please contact Cathryn Butler or another member of our Restructuring & Insolvency team or visit the CIGA page.