Insolvency laws could spell trouble for suppliers as UK supply chain woes continue
Recent changes to laws around insolvency could cause major problems for suppliers according to Bishop & Sewell. The London law firm is recommending that companies proactively review their commercial relationships and, where necessary, take steps to re-negotiate contracts and reduce their exposure to creditors.
George Marques, a Senior Associate Solicitor in Bishop & Sewell’s Corporate & Commercial team, said: “Recent headlines in the business news suggest the government is dismissing the possibility of economic difficulties ahead for the UK economy. However, in the current economic environment, and with supply chains under strain as a result of Brexit and COVID-19, now is the ideal time for suppliers to review their commercial relationships to make sure they are not exposed if customers go under.
“In particular, we recommend a commercial review of customer agreements including a review of Title Retention (ROT) clauses, which broadly allow a supplier to recover goods sold on credit. In situations of insolvency ROT clauses effectively stake a claim to a debtor’s assets in a way that removes them for the competing priority of claims that playout in administration and insolvency scenarios.
“ROT clauses are less effective than they appear in insolvency scenarios in particular against institutional lenders holding fixed and floating charges. The quasi-security offered by ROT clauses has become eroded in situations where goods are onward sold or incorporated/manufactured into the buyer’s products.
“While the US and EU regimes strike their own balance, the UK security regime favours institutional lenders over suppliers and other trade creditors. Perhaps in recognition of this imbalance, amendments to the Enterprise Act 2002 now require that floating charge creditors set aside a percentage of their recovered funds for distribution down the food-chain to unsecured trade creditors. But this percentage is not sufficient to make suppliers whole, particularly because in a priority contest their unsecured claims rank behind those of another class of unsecured creditor, the preferred creditor.
“Companies need to review current clauses and draft appropriate All-monies and Proceeds clauses to maximise the odds of circumventing claims of secured creditors, such as lenders and financial institutions whose lending arrangements with customers give them priority in the pecking order of recovery during administration or insolvency proceedings.
“To make matters worse for suppliers, it is no longer open to them to reduce their credit exposure in supply agreements to prohibit (or restrict) assignment of receivables by the customer/reseller. A regulation passed in 2018 under the Small Business, Enterprise and Employment Act 2015, known as the Business Contract Terms (Assignment of Receivables) Regulations prevents suppliers in most contractual situations from restricting the assignment of receivables by their customer/buyer.
“Suppliers also need to be aware of their customers’ factoring activities as these affect their ability to reclaim debts owing in the event of a priority contest with the factoring company. Since prohibition of assignments of receivables is banned, suppliers need to understand the impact factoring can have on their ability claw back goods sold under ROT provisions, which will be tested if their customer is suffering a cash crunch A proactive approach is needed.
“In addition, and in the wake of COVID, several changes to the UK insolvency regime were enacted as of last year. Among other things, where a customer is insolvent, provisions in supply agreements permitting a supplier to terminate or take other steps which would have the effect of ceasing supplies to a customer due to its past breaches or requiring debt arrears to be paid as a condition of continuing to supply the customer are void under the Corporate Insolvency and Governance Act (2020). This measure was taken by Parliament over concerns of possible disruptions to the UK economy resulting from the pandemic.”