TMA UK post event write up – May 2024 hosted by Squire Patton Boggs

On 15 May 2024, we were kindly hosted by Squire Patton Boggs, where Charlotte Møller and Michael Davar presented on how to de-risk supply chains and build protections into supplier and customer contracts. In addition, Georgie Messent focussed on ESG considerations in a restructuring scenario.

Charlotte explained that when it comes to addressing things like counterparty insolvency risk, it is important for businesses to think carefully before relying too heavily on one particular supplier as, if that supplier fails, it can cause significant issues for the business. If the business is currently tied into an exclusivity arrangement, it should consider renegotiating this at an appropriate time. Charlotte also recommended that businesses take time to understand each link in their supply chain and regularly monitor those in it so that the business is alerted to early signs of an insolvency event. For example:

• Take note of late or missed delivery dates.

• Is there a history of disputes (around quality or quantity, for example)?

• Are there any changes in behaviour?

• Conduct regular checks, for example credit checks, insolvency searches, Companies House alerts.

• Include an ability to audit key suppliers and business partners and actually exercise this right and review financial information.

Since 2020, in certain circumstances, suppliers can be prevented from terminating customer contracts solely on the grounds that their customer has entered an insolvency process. However, these restrictions often do not apply to pre-insolvency events, for example the filing of a notice of intention to appoint administrators. It is therefore even more important to look out for early warning signs of insolvency events and to take prompt action.

Georgie set out the implications, for TMA members, of new legally binding ESG corporate reporting obligations in the EU (which can impact on UK subsidiaries of affected legal entities). Georgie explained that lenders and others are in many cases requiring compliance by companies with certain ESG criteria.

Essentially, while the regulations will only apply to large organisations that pass certain thresholds, ESG risk management will be an important consideration in a restructuring context in determining the potential longevity of companies, particularly where additional funding may be needed from investors. If the company undergoing a restructuring does not have a sound ESG model, it may make it harder for investors to provide the required funding.

Georgie and Michael discussed the ESG due diligence needed to identify material risks that could require disclosure and different day to day management. They set out the new landscape of more comprehensive ESG practices and procedures that are being introduced to drive compliance.

Michael then discussed global supply chain issues, risk allocation, and director liabilities. He recommended several practical steps to identify and limit supply chain risk. This includes thorough review and identification of key supply chain risks, review of existing contracts, maintaining records, developing supply-chain strategies, and considering alternative means of performance.

It will of course also be important to consider what insurance coverage might be available in these circumstances.

Thank you to Squire Patton Boggs for putting on such an informative session!