As the childrenswear sector looks to overcome the disruption in supply chains and decline in consumption through trade restrictions and lockdowns imposed to reduce the impact of Covid-19, the government has introduced legislation changes with far-reaching consequences for the unwary.

In its attempts to kick-start the economy, a number of legislation changes have been made. Not just to help resuscitate the economy, but also prevent a host of UK companies choosing premature insolvency instead of trying to ride out the worst of Covid’s economic impact.

One of the most significant changes appears in Section 233B of the Insolvency Act 1986 (introduced by the recent Corporate Insolvency and Governance Act). This now prevents a business from terminating supply to a customer on the grounds the customer has become insolvent.

The new legislation applies to all contracts for the supply of goods and (non-financial) services. However, it only applies to suppliers. This leaves customers free to end a supply contract if it is the supplier that becomes insolvent.

It is clear in a sector that has suffered badly from the lockdown, with consumers cutting their spending in the face of uncertainty over jobs and wages, that this could be tough for suppliers who also cannot demand outstanding charges be paid as a condition of continuing to supply.

You can terminate contracts in specific circumstances

As a supplier, you are not prevented from terminating a contract in the period leading up to the insolvency proceedings or terminating after the insolvency proceedings began for any reason not triggered by that proceeding.

You can also terminate your contract with the consent of the insolvency administrator. If you believe continuing to supply would cause you hardship and the Courts agree, they may grant you permission to terminate.

If your customer enters a formal insolvency procedure, you can wait for a new reason to end the contract. For instance, non-payment for the supplies you delivered after the insolvency started. You may also be able to exercise other contractual rights, like contractual set-off and netting rights.

When your contract permits, you might also be able to terminate for convenience, but you must continue to supply your customer during the notice period.

If the existing contract is a single-purchase order, as a supplier, you may reject new orders from the customer, particularly when the contract is structured as a framework agreement and each new order constitutes a separate contract.

You can also refuse to renew an existing contract once it has expired and you or your representatives can negotiate with the insolvency office-holder to agree an end to the contract.

Review and future-proof your contracts

Now is the time to review the contracts you rely on to regulate your trading relationship with your customers and change them in light of legislation changes to protect your business. A few steps you might like to consider, include:

• Reducing the contract term to ensure you do not get locked into supplying your customer for a long time during the insolvency procedure. Admittedly, this must be balanced against the commercial objective of securing a long-term contract.
• Structuring your contracts as framework agreements so each supply is treated as a separate contract, which allows you to refuse orders from insolvent customers.
• Tightening your payment processes may provide an early warning of a customer experiencing financial problems before insolvency is triggered.
• Requiring regular financial information from the customer so you can assess their continued solvency. Include credit ratings and performance reports.
• Falling short of termination, you could include a provision allowing you to suspend further supplies under the contract for repeated or lengthy periods of non-payment by your customer.
• Allow termination for convenience and include as short a notice period as makes commercial sense.

Spend longer assessing customers when contract values increase

Businesses in the childrenswear sector, from clothing suppliers to manufacturers, will be impacted by the legislation change. Choosing customers wisely may slow growth, but could protect suppliers from the consequences of continuing to supply customers trading insolvently.

The first step will be conducting deeper due diligence on a customer’s financial position before agreeing contracts. Then monitoring payment performance carefully, to ensure you get an earlier warning of any likely difficulties.

It will be prudent for you to train account managers on what the impact of the change might be and the warning signs they should keep an eye out for. For example, ensuring payment of invoices on time and the tightening of debt collection procedures.

You must understand your contractual rights completely. You must be ready to exercise them to stop supply or terminate the contract promptly if one of your customers starts showing clear signs of financial distress.

Now is a good time to review your standard terms and conditions; ensure they still protect you against a customer’s insolvency as far as possible. If in doubt, seek expert legal advice. Small changes now could save you a lot of trouble in the future.

 

Lindsay Ellis is a partner and heads the Commercial Law team at Wright Hassall. He advises on outsourcing, procurement and commercial contracts across a diverse number of sectors including: retail; technology; transport/logistics; public; automotive; and engineering.

Wright Hassall is a top-ranked firm of solicitors based in Warwickshire providing legal services including: corporate law; commercial law; litigation and dispute resolution; employment law; and property law. The firm also advises on contentious probate; business immigration; debt recovery; employee incentives; information governance; professional negligence; and private client matters.