Confident Cashflow

This topic came up recently with a new client.

They’d been caught off guard when a customer went into administration and they were told they couldn’t stop supplying. They weren’t aware the rules had changed, and they’re not alone.

This legislation has been in place for a few years now, but it’s still not widely known in the small business world. And if you’re supplying other businesses on contract, it’s something you need to understand.

Because if you don’t know where you stand, you could be left exposed.

What changed, and why?

In 2020, the Corporate Insolvency and Governance Act introduced a new rule that prevents suppliers from ending contracts just because a customer has gone into an insolvency process.

It wasn’t a pandemic response, despite the timing. The change had been in development for some time and was part of a broader shift towards supporting a business rescue culture, more in line with how insolvency works in the United States under Chapter 11.

The aim is to give viable businesses a better chance of recovery by allowing them to continue trading while they restructure, including access to essential goods and services.

To support that, the law says certain suppliers must continue supplying, even if there are unpaid invoices, and contract clauses that say otherwise are overridden.

There was a temporary exemption for small suppliers when the law first came in, but that ended in June 2021. The rules are now permanent.

What you’re not allowed to do

If a customer enters an insolvency process such as:

• Administration (where an insolvency practitioner takes control of the business to try and turn things around).
• Liquidation (where the business is closed and its assets sold to pay creditors).
• Company Voluntary Arrangement or CVA (a formal agreement to repay debts over time).
• Moratorium (a temporary legal breathing space while the business restructures).

…you can’t:

• Terminate the contract because of the insolvency.
• Enforce any clause in your terms that allows you to do so.
• Refuse to supply unless outstanding invoices are paid.

If you’re considered a key supplier and the insolvency practitioner wants to continue receiving your services, you are required to supply them on the same terms.

Who does this affect?

This legislation applies to suppliers whose services are considered essential to the business’s continued trading or restructuring.

That might include:

• Utilities.
• IT and cloud services.
• Software providers.
• Raw materials or manufacturing inputs.
• Specialist trade services.

If you’re supplying something less critical, like stationery or branded merchandise, you may not be expected to continue. But it’s not always clear cut, and it depends on the nature of the business and your role in its supply chain.

What happens to unpaid debt?

Any money owed to you from before the insolvency process started is frozen. You can’t chase it, demand payment, or use it as a reason to stop supplying.

These pre-insolvency debts are added to the total amount owed by the business and are handled by the insolvency practitioner. Creditors are paid in a set order of priority. In most cases, you’ll be classed as an unsecured creditor, which means you may only receive a small percentage of what you’re owed, and it could take a long time to get anything back.

By contrast, anything you supply after the insolvency begins, as long as it’s clearly requested by the insolvency practitioner, must be paid for in full. These post-insolvency supplies are treated as part of the costs of running the administration or liquidation, which means they are far more likely to be paid.

What to do if a customer becomes insolvent

• Don’t assume you can walk away.
• Find out which process they’re in and who’s handling it.
• Speak to the insolvency practitioner to confirm what’s needed and how it will be paid for.
• Keep a clear record of all communications and supply requests.
• Get advice if you’re unsure where you stand.

Why this matters

This isn’t about catching anyone out.

It’s about knowing the rules, so you’re not left exposed when a customer’s situation changes.

Many small businesses are still unaware of this legislation. If you’re providing a service that’s important to how another business operates, this could apply to you.

If you’re not sure how your terms and conditions fit with the rules, or want to understand where you stand if a client becomes insolvent, we can help you get clarity.