CIGA bitesize: Termination of supplies: are your supplies essential or protected, or both?

With a view to supporting business rescue, the Corporate Insolvency & Governance Act 2020 (CIGA) introduced s.233B to the Insolvency Act 1986 (IA), which widens the circumstances in which suppliers can be prevented from terminating their supply of goods and/or services to a company in distress, or making the terms of that supply more onerous as a result of its insolvency or restructuring.

What are ‘essential supplies’?

By way of reminder, the meaning of ‘essential supplies’ was extended in 2015 from basic utilities (gas, electricity, water) to cover supplies of communication and other electronic services and hardware under ss233 and 233A IA (such as data storage, computers, points of sale terminals, IT support), reflecting the critical importance of digital to the functioning of most businesses in the modern era. 

Suppliers of essential goods and services subject to a contract entered into on or after 1 October 2015 cannot terminate supply unilaterally, or do ‘any other thing’ otherwise permitted by the contract terms (such as put the customer on higher charging rates) because of the customer’s insolvency status, if the customer goes into administration or becomes subject to a company voluntary arrangement.

If s.233A is engaged, the supplier is entitled to insist on a personal guarantee from the office-holder as a condition of ongoing supply (although cannot demand that any arrears be paid), and can terminate during the insolvency process if any new liabilities remain unpaid for 28 days.

What other supplies are now protected?

The latest provisions set out at s.233B go further in several respects:

• It applies regardless of the date of the supply contract, so long as the relevant insolvency/restructuring commences on or after 26 June 2020
• It applies to all supplies of goods and services, subject to specific carve-outs (such as for financial services contracts, as defined in Sch 4ZZA IA)
• It is triggered in a much wider set of insolvency processes:
  • CVA
  • administration
  • administrative receivership
  • liquidation
  • provisional liquidation
  • the newly introduced moratorium
  • the newly introduced restructuring plan (but not a scheme of arrangement).

The impact on suppliers is broadly the same: they can be called on to continue to supply (although in practice not all supplies will necessarily be needed by the company), and cannot terminate or do ‘any other thing’ as a result of the insolvency.  However, where s.233B is engaged, suppliers cannot insist on a personal guarantee from the office-holder, and there is no automatic entitlement to terminate further supplies if not paid for within 28 days of falling due, it will depend on the contractual provisions.

s.233A v s.233B

Where s233A is triggered, that takes precedence over s233B (para 1 of Schedule 4ZZA to the IA, as introduced by s.14(2) CIGA).

The different requirements under s.233A and s.233B require some consideration, particularly where a supplier provides essential services under contracts that both pre-date and post-date 1 October 2015. 

For example:

• if the customer becomes subject to a moratorium, s.233B will apply to all contracts as the moratorium is not a qualifying procedure for s.233A.
• If that customer were then to go into administration, the post-October 2015 contract would be dealt with under s.233A (as this trumps s.233B) and s.233B would apply to supplies under the pre-October 2015 contract (as s.233A would not be engaged for old contracts).

For further information on this article, please contact a member of our Restructuring & Insolvency Team or visit the CIGA page.