Corporate Insolvency and Governance Act 2020 – Continued access to supplies
On 28 March 2020, the UK Government announced plans to bring forward legislation to introduce new measures to aid restructuring of companies.
As a result, the Corporate Insolvency and Governance Bill was laid in Parliament on 20 May 2020 and this came into force as the Corporate Insolvency and Governance Act 2020 (CIGA 2020) on 26 June 2020.
The overarching objective of CIGA 2020 is to provide businesses with the flexibility and breathing space they need to continue trading and avoid insolvency during this period of economic uncertainty.
A series of articles has been produced looking at the various measures introduced by CIGA 2020. This one focuses on continued access to supplies.
Territorial extent, effective date and period of operation
This measure extends to the whole of the UK and commenced on 26 June 2020. As this matter is partially devolved a Legislative Consent Motion was obtained from the Scottish Parliament.
This forms a permanent change to legislation.
Termination clauses in supply contracts
When a company enters a rescue, restructuring or insolvency procedure, suppliers often stop supplying it under a contractual termination clause triggered by insolvency.
The current law under sections 233 and 233A of the Insolvency Act 1986 (‘the 1986 Act’) makes limited provision to invalidate termination clauses, in certain company insolvency and rescue procedures and in relation to specific supplies such as gas, electricity, communication and certain electronic services.
What has changed?
CIGA 2020 prohibits termination clauses (sometimes called ‘ipso facto’ clauses) that engage on insolvency or are based on past breaches of contract. This will mean that (subject to certain exclusions) contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears.
Section 14 of CIGA 2020 introduces section 233B to the 1986 Act. The new section prevents suppliers of a much wider range of supplies relying on termination clauses or doing ‘any other thing’, due to a company entering a qualifying restructuring or insolvency procedure.
The policy intention is to help companies trade through a restructuring or insolvency procedure, maximising the opportunities for rescue of the company or the sale of its business as a going concern. The measure is intended to complement the new moratorium and restructuring plan procedures, which are aimed at enhancing the rescue opportunities for financially distressed companies.
New Schedule 4ZZA to the 1986 Act provides for the companies and services which are excluded from the provisions. They are predominantly financial services and essential services excluded by pre-existing provisions of the 1986 Act such as insurance companies and banks.
Temporary exclusion for small suppliers
Small entities are exempted from the provisions, as a time limited COVID-19 related measure.
For these purposes a supplier is a small entity if at least two of the following conditions were met in relation to its most recent financial year:
- the supplier’s turnover was not more than £10.2 million.
- the supplier’s balance sheet total was not more than £5.1 million.
- the number of the supplier’s employees was not more than 50.
This is a temporary measure due to expire on 30 September 2020, although that expiry date may be extended or reduced.
Suppliers can apply to the court for permission to terminate a contract on the grounds of hardship. A contract can also be terminated with agreement from the company (where the company has entered a moratorium, voluntary arrangement or restructuring plan) or the office holder (in any other relevant procedure).
It should be noted that suppliers retain the ability to terminate contracts on any other ground permitted by the contract, including:
- non-payment of liabilities incurred following entry into a moratorium, restructuring plan, or insolvency procedure.
- giving notice in accordance with other terms of the contract.
- any other ground that gave rise to termination, save for those connected with the debtor company’s financial position, or the fact it had entered a moratorium, restructuring plan, or insolvency procedure.
There is no effect on ordinary contract termination based on time, i.e. if a fixed-term contract expired during a moratorium, restructuring plan, or insolvency procedure, the supplier would not be compelled to continue nor renew the contract.
For the time being the effect of this new legislation may, to a large degree, be negated by the temporary exclusion for small suppliers, while that exclusion is in force.
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