Companies Undergoing Liquidation Afforded Enhanced Security as “Essential Suppliers” Prevented from Terminating Contracts

Additional Security for Firms in Liquidation
Additional Security for Firms in Liquidation

In accordance with recently proposed governmental plans, IT and utility companies, that provide “essential” supplies, could find themselves banned from enforcing termination clauses in contracts made with companies experiencing financial turmoil.

The proposals, which if implemented, would adhere to stipulations entailed within the 2013 Enterprise and Regulatory Reform Act, first discussed in February 2013. This Act specified that suppliers within the IT & other utility sectors would have to continue providing goods and agreed-upon services to an insolvency practitioner trying to see an ailing business through company liquidation.

These measures are seen to “aid business recovery” and thwart suppliers in their bid to gain an advantage over other creditors, according to Jo Swinson, the Under Secretary of State for Employment Relations, who said: “These proposals are good news for employees of insolvent businesses, creditors and insolvency practitioners who are trying to rescue ailing companies.

Businesses are currently closing down because insolvency practitioners are unable to secure the essential supplies they need to deliver the best outcome for creditors and employees.”

“The measure also demonstrates the government’s commitment to doing all we can to save jobs and build a stronger economy. I look forward to hearing the views of all interested parties to ensure that the right balance is struck when implementing these changes,” she added.

The period of consultation extends to the 8th October, and includes a number of protections to financially secure the suppliers being compelled to continue supplying businesses undergoing liquidation. For instance, suppliers are capable of requesting a personal guarantee from the insolvency practitioner spearheading the liquidation process with regard to any post-insolvency. They also retain the right to discontinue supply if any post-insolvency supplies remain unpaid for over 28 days.

At present, insolvency law permits a select few utility suppliers to seek a personal guarantee from an insolvency practitioner before continuing with supply. However, these suppliers may not strong-arm ailing companies into paying of pre-insolvency debt as a requisite of continued supply. Essentially, changes suggested in the proposal would entitle IT suppliers and private sector energy suppliers, to the same provisions as the above utility suppliers.

Government consensus leans towards the synthesis of secondary legislation which would nullify any contractual conditions which allow suppliers, integral to a company’s business, to withdraw their offering of stock to an insolvent company. Defined as those which have entered administration or a voluntary arrangement under the 1986 Insolvency Act, insolvent companies have long been talked about in terms of the process of rejuvenation, and these latest measures could go some way to doing just that. Suppliers would also be unable to increase charges, or amend other pre-ordained terms of supply, in other preventative measures taken by the government.

The news has been welcomed by many insolvency firms, none more so than trade body R3, who lobbied tirelessly for the changes. Its president, Giles Frampton, bemoaned termination clauses which strangle companies seeking to fight their way from the depths of liquidation:

“Our members estimate that banning termination clauses in supply contracts could help save over 2,000 businesses a year,” he said.

“R3 campaigned long and hard for action to be taken on termination clauses, winning support from the business and creditor communities. We are very pleased that an end to the use of termination clauses by crucial suppliers is one step closer.”

“Business rescue is in the interests of both creditors and insolvent businesses and their employees. Turning a business around can be a much better outcome than that business being liquidated. Scrapping termination clauses will give many struggling businesses a better chance of survival and should boost the UK’s business rescue culture,” he surmised.

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