The grass is not always greener for suppliers: the collapse of the Arcadia Group

Posted: 02/12/2020

With the news that the Arcadia Group has entered administration, suppliers of goods and services are left with a number of questions: what happens next, and can they still get paid? The answers to such issues have recently been drastically altered by the Corporate Insolvency and Governance Act (CIGA) 2020. Its impact is discussed in the eight key points considered below.

What would happen in ‘normal’ circumstances? A manageable problem

Prior to the introduction of CIGA 2020, suppliers could terminate their legal relationship with a struggling entity following a ‘relevant insolvency event’, depending on their contractual terms (unless the supplier was an ‘essential supplier’ as defined in s233 of the Insolvency Act 1986).

Any unpaid debts owed at the point of the relevant insolvency event would class the supplier as an ‘unsecured creditor’. This would mean that if the struggling company was wound up, then eventually the supplier may receive some payment. However, this would be unlikely to ever be the full amount of the debt, but rather a certain amount of pence per pound owed.

In the best case scenario, the struggling entity would turn itself around. However, a supplier is still very unlikely to be paid in full and has to accept a lesser amount than the total owed.

So even prior to CIGA 2020, circumstances such as these clearly impact upon a supplier’s own cash flow.

What will happen in the current circumstances? More pressure on suppliers

CIGA 2020 was put in place due to the Covid-19 pandemic, in order to assist businesses in difficulty. Specifically, section 14 of CIGA 2020 sets out:

• any rights that the supplier may have had to terminate the supply, or do ‘any other thing’ based on the recipient’s insolvency, cease to exist;
• any right that the supplier may have had to terminate the supply for any reason, if the right arose before the recipient’s insolvency arose, ceases to exist; and
• a supplier is prohibited from making any continued supply to the recipient conditional on payment of previous outstanding debts.

In plain English, this means that suppliers must continue to supply their goods and/or services even though the recipient has become subject to a relevant insolvency procedure. This includes where a debt is owed to the supplier at the point of the relevant insolvency procedure coming into effect.

Therefore, CIGA 2020, whilst intending to help struggling companies by forcing the continued supply of goods and services which they require from counterparties, in fact dramatically impacts on the cash flow of those suppliers. The suppliers themselves are already likely to be feeling the economic effects of the Covid-19 pandemic.

What about unpaid invoices prior to the ‘relevant insolvency event’?

Unfortunately, any outstanding debts and unpaid invoices at the onset of the relevant insolvency event are not immediately payable. Instead, these are unsecured debts as per the usual procedure set out above.

Therefore, suppliers are expected to continue supply without receiving the outstanding payments for their previous supplies and cannot demand payment of pre-insolvency debts as a requirement for continued supply.

Does a supplier have to continue to supply its goods and services for free?

Fortunately, the legislation under CIGA 2020 does not state that continued supply of goods and services has to be provided for free to the recipient during the relevant insolvency procedure.

Therefore, for any future goods and services supplied after the onset of a relevant insolvency procedure, the supplier must receive payment in accordance with the usual terms. In the event of a post-insolvency procedure breach, a supplier will be able to terminate the supply. This does however mean that if the terms are that payment is not due on demand, or in accordance with short payment terms, a supplier’s unsecured liability may increase.

So can a supplier not terminate at all?

Thankfully, there are some limited exceptions to the rule, where the supplier may still be able to terminate the supply. These are as follows;

• in a case where the company in receipt of the supply has become subject to a relevant insolvency procedure and the office-holder consents to the termination of the contract;
• in any other case, the company in receipt of the supply consents to the termination of the contract; or
• the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract.

Whilst the third provision may be a likely exemption for a supplier to attempt to rely on, in some ways it seems counterintuitive. In order to plead hardship for the termination of the supply, the supplier must first make a costly application to do so.

What about if the supplier is a small company?

There is also a ‘small entity’ exclusion which allows the supplier to still terminate supply, provided it meets at least two of the following three criteria:

• the supplier’s turnover was not more than £10.2 million;
• the supplier’s balance sheet total was not more than £5.1 million; or
• the number of the supplier’s employees was not more than 50.

This temporary exclusion at least provides some added protection for smaller suppliers. An entity can be: a company; a limited liability partnership; any other associated body of persons, whether incorporated or not; and an individual carrying out trade or business.

How long will the temporary exclusion of small entities from the obligation to continue to supply goods and services under the CIGA 2020 provisions last?

Whilst a number of the measures brought into effect by CIGA 2020, such as the prohibition on winding-up petitions, are temporary, it is important to note that the general obligation on suppliers to continue to supply is not and that CIGA 2020 has a permanent effect on a supplier’s right to terminate due to a relevant insolvency procedure.

It is the exclusion of small entities from the obligation to continue to supply which is temporary. It is possible that, depending on the economic recovery from the pandemic, the small entity exclusion - which is currently in place until 30 March 2021 under CIGA 2020 - could still be extended further. However, unless amended, this exemption will expire on that date and as of 31 March 2021 a small business would be prevented from exercising a right to terminate the supply of goods and services which is triggered by a relevant insolvency procedure.

What should suppliers do in this situation? What can be done to improve their position?

There are some options available to a supplier that would help protect it moving forward with continued supply to a company in a relevant insolvency procedure. Such steps include considering whether the above exemptions apply – specialist legal advice may be helpful.

Further, it may be possible to alter the terms and conditions between the parties prior to a relevant insolvency procedure in order to shorten the contract length to a rolling weekly or monthly contract. As a result, if there was a default by the struggling recipient of supply, then termination by the supplier may be able to happen sooner, therefore reducing the level of debt owed to a supplier.

Businesses must take proactive steps as soon as possible in reviewing and amending supply contracts, as an attempt to accelerate terms shortly before a relevant insolvency procedure is likely to be ineffective. Small businesses have a unique opportunity to ensure their contractual relationships with counterparties are in order and offer protection in the event of a relevant insolvency procedure prior to the end of their exclusion from the CIGA 2020 provisions (currently 30 March 2021).

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