COVID-19 rescue act or major overhaul of the UK insolvency framework?

As we go into England’s second national lockdown of this COVID-19 pandemic, greater numbers of companies, large and small, face significant economic challenges. It is therefore even more important this time round to be aware of the changes implemented by the Corporate Insolvency and Governance Act 2020 (CIGA 2020) on 26 June 2020 and the impact that these could have on you and your business.

The CIGA 2020 was introduced in response to COVID-19 with a view to providing protection and stability for companies encountering financial distress as a result of the economic fall-out of the pandemic. The act includes a number of ‘debtor-friendly’ provisions designed to help companies continue trading in the face of significant financial difficulty with the aim of increasing the likelihood of recovery, rescue or sale of the business as a going concern.

Although CIGA 2020 was implemented very speedily, it is by no means a short-term or temporary solution. It has resulted in a substantial reformation of the UK’s entire legislative insolvency framework. You should consider the consequences of these reforms carefully and their impact on your supply contracts.

CIGA 2020 is a complicated and lengthy piece of legislation and includes various amendments to other acts including the Insolvency Act 1986 and the Companies Act 2006. Below is a short summary of the main changes that you should be aware of.

Prohibition on the termination of contracts by reason of insolvency

• Under the new Section 233B IA 1986 suppliers can no longer rely on automatic termination provisions, or exercise their option to terminate contracts for the supply of goods and services with customers who have commenced insolvency or restructuring proceedings, unless the parties agree or the court grants permission on the grounds of supplier hardship
• S233B also has retrospective effect so even if the supplier was entitled to terminate the contract prior to the insolvency or restructuring proceedings’ commencement, once it begins, the supplier loses that right
• However, it is important to note that:
  • this prohibition does not prevent suppliers from terminating contracts on grounds other than insolvency; and
  • ‘small entity’^[1] suppliers can still rely on insolvency-based termination clauses if they supply to a company who started insolvency proceedings between 26 June 2020 and 30 March 2021

Temporary prohibition on statutory demands and winding up petitions by all creditors seeking to recover debts from companies financially effected by COVID-19

• Statutory demands made between 1 March and 31 December (initially 30 September but now extended) will be void
• Winding up petitions presented between 1 March and 31 December 2020 will be dismissed and no winding up orders made if the court determines the failure to pay was due to COVID-19

Temporary suspension of wrongful trading provisions under s214 IA 1986

• During the periods of 1 March to 30 September 2020, directors will be assumed not to have been responsible for any worsening of the financial position of their company or of its creditors (not extended to 31 December)

Relief of administrative burden

• CIGA 2020 has temporarily extended deadlines for filing company accounts and reports at Companies House as well as expanding filing time frames for other documents, such as those related to insolvency proceedings
  

Protective moratorium

• Under the new moratorium provisions (which may last for an initial 20 days – extendable for a further 20 with possible further extensions for up to a year) the existing directors have time to put in place a rescue plan for the company, without being required to pay debts which fell due prior to entering the moratorium

New Part 26A CA 2006 Restructuring Plan

• This is a new tool for company restructuring whereby those in dire financial straits can propose arrangements with their creditors and members

While many of these provisions bring much-needed and welcome recovery strategies for at-risk companies, the prohibition on exercising termination clauses poses serious issues for many suppliers. If you are a supplier it is important to be aware of your rights and to take steps to make sure that you are also protected if your customers enter insolvency proceedings. Consider the following options:

• Review your supply contracts and ensure that you have a range of termination options outside of reasons of insolvency (such as for non or late payment)
• Reduce your supply contract terms (perhaps having a series of shorter, lower value contracts to limit your exposure)
• Confirm that your supply contracts contain adequate retention of title clauses (so that you can get your stock back)
  
  

References

1. Refer to the detailed guidance on what amounts to a ‘small entity’ at section 15 CIGA 2020 – “Temporary exclusion for small suppliers: Great Britain”