Small business suppliers: Dealing with the financial stress of coronavirus?

Extended protection measures

A number of temporary changes, designed to protect struggling businesses from insolvency during the coronavirus pandemic, were introduced by Corporate Insolvency and Governance Act (CIGA) as well as various permanent changes. Temporary provisions were due to expire on 30 September 2020. However, with a second wave of coronavirus cases, further legislation (The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020) has come into force. This extends an important temporary protection which is specifically designed to protect small businesses involved in the supply of goods or services.

Many commercial contracts for the supply of goods and services contain clauses to allow for termination of the contract in the event that a party enters into any insolvency proceedings (or if such action is threatened). A supplier would often refuse to continue supplying the other party with goods or services in an insolvent situation, unless it settled outstanding debts. These types of clauses are known as ipso facto clauses and much coverage has already been given to this reform.

Following, CIGA suppliers of goods and services are unable to rely on such contractual clauses that allow termination in the event of a ‘relevant insolvency procedure’. This is defined in CIGA and it can include anything from administration, the appointment of a receiver, liquidation, moratorium and a restructuring plan. The provision is broad as a creditor is also unable to do ‘any other thing’ as a result of the insolvency or restructuring. For example, increasing its prices or insisting on less favourable payment terms. CIGA also prohibits the termination of a contract where the creditor had a pre-existing right of termination which arose before the relevant insolvency or restructuring but was not exercised by the creditor. The restriction remains in place throughout the insolvency procedure. It remains possible to terminate for grounds other than insolvency/restructuring if the contractual right to terminate did not arise pre-insolvency.

Despite this radical reform being implemented small suppliers (companies, LLPs and individuals) should be aware of an important exemption that may assist if they find themselves supplying to a party that enters into any insolvency provisions (or if such action is threatened). For small businesses (defined by turnover (£10.2m), balance sheet total (no more than £5.1m) and/or employee numbers (no more than 50)) there is a temporary exemption. Small businesses who satisfy at least two of these criteria in their last financial year are exempt from the changes and can choose to take advantage of an exemption to terminate (or amend terms in) a supply contract until 30 March 2021. This could be very important for small businesses struggling in the coronavirus environment. The Federation of Small Businesses (FSB) indicates that 5.8 million small businesses in the UK make up 99.3 per cent of all private sector businesses and that poor payment practices, such as late payments, affects 80% of the UK’s small business community. FSB also calculates that late payments to SMEs costs the UK economy as much as £2.5 billion every year and causes 50,000 small firms annually to close their doors. This temporary relief therefore will benefit a huge number of businesses.

Whether we see this period extended further will, no doubt, depend on the coronavirus and how it is spread or contained within the next few months. For now small businesses may be able to take advantage of this protective measures to navigate the challenges ahead. Unless extended again, once the temporary period ends small suppliers will no longer be able to terminate a supply contract or changing contractual terms due to insolvency related reasons unless they seek an order from the court on the basis of hardship. So now is the time for small businesses to looks at its customer base and consider renegotiating credit levels, payment terms and other contractual provisions which will allow them to terminate when insolvency of the customer is no longer a means to exit the contract.