COVID-19 – What will proposed changes to UK insolvency law mean for commodities market participants?
As previously reported, the UK Government has announced that it will urgently bring forward proposed reforms to the corporate insolvency regime, to give "breathing space" to companies in financial difficulty as a result of Covid-19. The proposed reforms, based on a consultation in 2018, include new restructuring and temporary moratorium procedures.
Significantly for the commodities sector, the reforms could also prevent suppliers in contracts for the supply of goods and services from exercising termination rights on the basis that their counterparty has entered into a formal insolvency procedure(including the new restructuring and moratorium procedures) and/or had insolvency proceedings commenced against them. Certain financial products and services are likely to be exempted from this restriction.
Termination on the basis of counterparty insolvency is a common mechanism used by participants in commodities markets to protect themselves against the risk of non-performance. Under the proposed reforms, suppliers in commodity contracts could find themselves required to continue performance for longer than would be commercially attractive. Importantly, they would retain the ability to terminate on other grounds specified in the contract, such as non-payment, but this may offer less protection, particularly where payment under the contract is not in regular instalments.
The proposed reforms also contemplate that as a safeguard of last resort, suppliers would be able to rely on an insolvency based contractual termination right in circumstances where they themselves would otherwise face undue financial hardship and where they obtain permission from the court. For this purpose, the court will consider whether:
- by refusing permission to allow the supplier to terminate supply, the supplier would be more than likely to enter one of the insolvency procedures; and
- exempting the supplier from the restriction on terminating its supply would be reasonable, having regard to the impact of non-supply on the recipient company and its prospects of rescue.
Obtaining permission from the court in these circumstances is likely to be difficult for suppliers given the intentionally high threshold in the proposals, as well as being time-consuming in a critical period when time is likely to be of the essence.
In addition to physical commodity contracts, the proposed reforms may also apply to trade finance contracts and commodity derivative contracts - although it is expected that these would fall outside the scope of the proposals, where precisely the boundary will fall with respect to commodity contracts remains unclear.
Further updates will follow as more information becomes available and our Insolvency team is preparing a briefing on dealing with Covid induced insolvencies.
For more information, please contact:
T +44 (0)20 7264 8354
T +44 (0)20 7264 8087
Research undertaken by James Stewart