New insolvency laws will see the end of long-term supplier contracts

New insolvency laws introduced today are likely to fundamentally change the relationship between businesses and their suppliers resulting in shorter supply contracts, say accountants Mercer & Hole.

The Corporate Insolvency and Governance Act introduces new restrictions that will force suppliers with long-term supply contracts to continue to supply a business in formal insolvency procedures even though it may not survive as a going concern.

It is likely to see supply chain businesses revert to short-term contracts to avoid being caught by the new regulations.

Chris Laughton, a corporate restructuring partner at Mercer & Hole explains.

“The Act introduces major changes to the insolvency regime including changes to supply agreements, a new moratorium procedure and temporary softening of the wrongful trading rules.

“Suppliers with future supply contracts will from today be forced to continue to supply a business in formal insolvency procedures, even when owed significant sums of money. They won’t be able to terminate the contract on grounds of non-payment or customer insolvency.

“The aim is laudable to secure a long-term future for the insolvent business, but suppliers with lengthy supply contracts will be dismayed that they have lost the contractual right to stop supplying an insolvent company.

“We envisage businesses with such agreements will look carefully at them and change terms so they’re not caught by the new law. The relationship between businesses and their suppliers will change, with long term supply agreements disappearing.”

The Act also softens the wrongful trading rules during the coronavirus pandemic, limiting the liability of a company director who continued to trade and caused further losses when they knew the business was insolvent.

The changes, says Chris, were announced in advance to encourage directors to keep their businesses trading during the crisis if they could.

“But the temporary changes are more limited than people might have expected from the initial government announcements. And most directors who might be pursued for wrongful trading are usually sued on grounds of breach of duty. Those duties are codified in the Companies Acts and are not affected by the changes to wrongful trading law.“Directors who thought they would be able to risk creditors’ money with impunity and take advantage of the crisis are likely to be pursued anyway.”