Permanent obligations under Corporate Insolvency and Governance Act 2020
The Corporate Insolvency and Governance Act 2020 (CIGA) brought in a number of extraordinary changes to the corporate, insolvency and restructuring world in light of the COVID-19 pandemic, aiming to offer those corporate bodies most affected by the pandemic some respite for recovery.
Although many of the provisions under the act are temporary, a permanent introduction is the obligation on suppliers to continue to supply insolvent corporate clients on an ongoing basis, even where the supply contract may otherwise have entitled them to terminate as a result of the insolvency event.
CIGA states that:
- A termination provision (whether operating automatically or requiring an election to be made or notice to be given) in a contract for supply of goods or services which is triggered by the customer’s entry into an insolvency process, is now invalid; and
- The exercising of termination rights during insolvency proceedings which the supplier became entitled to before the company entered the insolvency process, is similarly invalid.
CIGA limits not only the exercising of termination rights as a result of an insolvency event, but “any other thing”, which although new, is being interpreted to include the likes of a change in payment terms or an increase in pricing if connected to the insolvency event.
The provisions also have retrospective effect meaning it covers contracts entered into prior to the adoption of CIGA on 26th June 2020, and makes a permanent amendment to the Insolvency Act 1986.
CIGA does allow a temporary exemption for “small companies”, currently in place until 30 March 2021, where the supplier is exempt from the provisions under CIGA if it can evidence that two of the following apply:
- It has a turnover of less than £10.2 million;
- It has a balance sheet of less than £5.1 million;
- It has fewer than 50 employees.
The new provisions will not apply in relation to contracts for the supply of goods or services to a company in the context of financial services.
The supplying company can also be relieved of the obligation by the office holder or the company agreeing to termination, or where the court grants permission to do so having been satisfied that the continuation of the contract would cause the supplier “hardship” (currently interpreted to relate to potential insolvency of the supplier itself if the obligation continues).
Although the supplier is unable to rely on the right to terminate for a breach which occurred prior to the insolvency event, after the insolvency event has commenced, any subsequent breaches during the insolvency event can still be relied upon in order to end the contract (provided the requisite rights are included within it).
To offer some protection in light of the introduction of CIGA, supplying companies should consider:
- The shortening of payment terms (prior to entering into a contract) shall encourage cash flow and mean any post-insolvency breach can be actioned quickly;
- Seeking potential warning signs for any difficult contracts to help take preventative action;
- Suitable due diligence into the financial position of customers, determining whether or not they hold well managed documentation and contract management;
- Other termination triggers if the company shows early or initial signs of financial difficulty;
- An update of standard contract termination provisions to take account of CIGA.
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This article was produced on the 30th October 2020 by our Business & Commercial team for information purposes only and should not be construed or relied upon as specific legal advice.