Changes to UK’s insolvency regime in the wake of Covid could spell trouble for suppliers

Within weeks of the 1st Covid-19 lockdown, Parliament enacted several changes to the UK insolvency regime over concerns of possible disruptions to the economy. According to George Marques, Head of Corporate at Redfern Legal LLP, these changes could cause major problems for suppliers.

The Central London law firm, which specialises in corporate, commercial and business immigration law, is recommending that companies that are part of the UK supply chain proactively review their commercial relationships and, where necessary, take steps to re-negotiate contracts and reduce their exposure to highly indebted businesses. Redfern Legal believes now is the ideal time for suppliers to review their commercial relationships to make sure they are not exposed if their customers go under.

“Whilst the headlines in the business news suggest the government is dismissing the possibility of economic difficulties ahead for the UK economy, supply chains remain under strain on the back of Brexit and COVID-19, with many companies having to take on extra debt to stay afloat”, explains the Head of Corporate at Redfern. “So, Parliament decided to step in to ensure that suppliers to highly indebted companies do not imperil supply chains by cutting off customers who fall behind on their payments.”

Under the Corporate Insolvency and Governance Act (2020) – CIGA – provisions in supply agreements permitting a supplier to terminate (or take other steps which would have the effect of ceasing) supplies to an insolvent customer due to past breaches or requiring debt arrears to be paid as a condition of continuing to supply, are void. To be sure, CIGA exempts certain suppliers from its purview and does not apply in all circumstances.

Nonetheless, for suppliers who are concerned about the creditworthiness of their customers, Redfern Legal is recommending a commercial review of customer agreements. “The UK property security regime favours institutional lenders over suppliers and other trade creditors and therefore special attention should be given to Title Retention (ROT) provisions”, explains Marques.

Broadly speaking, ROT clauses allow a supplier to recover goods sold on credit in the event of an insolvency. These clauses effectively stake a claim to a debtor’s assets in a way that removes them for the competing priority of claims that play out in administration and insolvency scenarios.”

“ROT clauses are not always as effective as they appear”, says Redfern’s Head of Corporate. “A number of court cases have eroded the efficacy of ROT, All Monies and Proceeds clauses, for example, where goods are manufactured or incorporated into other goods or sold off by the buyer.”

Accordingly, suppliers need to review current agreements to maximise the odds of circumventing claims of commercial lenders holding fixed and floating charges over borrowers’ assets which generally give them priority in the pecking order of recovery during administration or insolvency proceedings.

To succeed in priority contests with institutional lenders, suppliers need to be sure their agreements are appropriately worded and take existing case law in account. In addition, other contractual mechanisms for protecting receivables should be considered and evaluated on a case-by-case basis.

Redfern Legal LLP, has the knowledge and expertise to provide sound and practical advice on these matters.

George Marques