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New law: Suppliers must continue to supply insolvent customers even if the customer has failed to pay them for goods or services already supplied

Suppliers need to diligently monitor their customers, and their contracts with them, for signs of looming insolvency, so the supplier can act before they lose the right to do so under new laws which take away suppliers’ rights in commercial contracts to terminate a contract for non-payment if a customer is insolvent.

Legal Alert August 2020

This update was published in Legal Alert - August 2020

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

The aim of the new laws is to help companies carry on trading despite their insolvency, so they have a better chance of recovering, selling the business, or at least maximising the amounts available for creditors.

But the new laws also mean that suppliers who have not been paid for goods or services already supplied will no longer be able to treat their contract as ended once the customer is insolvent, and refuse to supply further goods or services until they are paid. Instead, they must continue to supply their (now insolvent) customer, provided the customer pays for the new goods and/or services.

Nor is the supplier allowed to do ‘any other thing’ on grounds the customer is insolvent. This could include changing payment terms because of an insolvency, or exercising any other right that applies on an insolvency.

A customer is insolvent if they have entered into an administration, administrative receivership, approval of a company voluntary arrangement, liquidation or a provisional liquidation. There is also an insolvency if two new processes have occurred – a moratorium, or a convening order under a restructuring plan – under new laws that apply from 26 June 2020.

There are exemptions until the end of September 2020 if the supplier is a ‘small entity’. To qualify it must, in its most recent financial year, satisfy at least two of the following (unless it is in its first year of trading, when different thresholds apply):

  • Turnover not more than £10.2 million.
  • Balance sheet total not more than £5.1 million.
  • Average number of employees not more than 50.

A supplier can also ask a court to terminate the contract if it can show it suffered ‘hardship’ because of the new provisions, but this is not defined.

Operative date

  • Now

Recommendation

  • Suppliers need to diligently monitor their customers for signs of looming insolvency, and their contracts with them, so they can act before they lose the right to do so, as a result of new laws which outlaw terms in commercial contracts which enable the supplier to terminate the contract for non-payment if a customer is insolvent.

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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