The Corporate Insolvency and Governance Act (CIGA) came into force on 26 June 2020, introducing significant reforms intended to provide breathing space for companies during the coronavirus pandemic.
These measures may be a welcome relief to some struggling companies. However, they could prove problematic for suppliers, who will need to tread especially carefully when dealing with distressed or insolvent companies.
What has CIGA changed?
CIGA has introduced an array of measures, including a temporary relaxation of corporate governance and wrongful trading rules, and reform to the UK insolvency regime.
Importantly, CIGA also prohibits clauses in contracts which allow suppliers to terminate a contract for the supply of goods or services due to a customer's insolvency. Suppliers now need to keep a very careful eye on customers and consider acting swiftly to terminate a contract which has been breached, to avoid losing the right to terminate it. This is a dramatic departure from the long-held principle of contractual freedom, and affects contracts already in force.
Prohibition on Termination or Ipso Facto clauses
When a company enters a restructuring or insolvency procedure, suppliers are often left with arrears owing to them. Consequently, they stop supplying the insolvent company, relying on a contractual termination clause triggered by insolvency, or on a breach of contract based on the overdue arrears.
It's long been the practice that a critical supplier can leverage its position in the insolvent estate by refusing to supply essential supplies, without first being paid all their arrears. As part of the new provisions to assist the recovery of financially distressed companies during COVID19 (and beyond), suppliers can no longer rely on these termination rights or a right to alter their trading terms with the insolvent company. A supplier must continue to supply under the terms of the contract, in return for payment in respect of supplies in the future, regardless of the customer's pre-insolvency arrears.
Additionally, suppliers will no longer be able to rely on their right to terminate a contract (or improve the terms on which it is prepared to trade) based on breaches that have happened before a customer's insolvency. When the customer enters an insolvency process, the supplier will lose its rights to terminate the contract based on any breach that existed before the customer entered the insolvency process – however serious the breach.
Some support for suppliers
Whilst CIGA has been introduced to provide necessary relief for financially distressed companies, some key considerations have been incorporated for affected suppliers. As a temporary measure, until at least 30 September 2020, there will be an exemption for small businesses which some suppliers will be able to take advantage of.
A supplier will benefit from the exemption if, in its most recent financial year, it satisfied at least two of the following conditions: its turnover was not more than £10.2 million, its balance sheet turnover was not more than £5.1 million and the average number of its employees was not more than 50.
It may also be possible for suppliers suffering hardship as a result of the new provisions to seek the permission of the court to terminate the contract, but how practical that will be in reality remains to be seen.
What should suppliers do?
As a supplier, you should be particularly alert to customers who are in arrears, or who are in breach of contract. Be prepared to act swiftly to protect your position, before you lose the right to do so.
We recommend you undertake a review of your commercial contract, to understand what protections you have which may help to protect against the impact of these new provisions.
When entering into new contracts, ensure you have sufficient protections built into the contract to provide for termination based on financial distress ahead of formal insolvency.
Changes to Corporate Governance
CIGA has temporarily introduced two measures to give companies greater flexibility in their corporate governance duties, amid the COVID19 restrictions:
- Annual General Meetings due to take place between 26 March 2020 and 30 September 2020 can either be held virtually, even if the company's articles of association do not provide for this, or can be held by way of a physical meeting attended by two individuals, with shareholders voting by proxy.
- Automatic extensions to filing deadlines at Companies House, for certain filings such as confirmation statements and registrations of charges.
Changes to the Insolvency Regime
- Temporary Prohibition on Winding up Petitions:
CIGA has introduced a temporary ban on winding up petitions during the period 1 March 2020 to 30 September 2020. There is an exception, where creditors can prove reasonable grounds for believing that COVID19 has not had a financial effect on the debtor, or that the debtor would have been unable to pay its debts regardless of COVID19.
Insolvent companies or those at risk of insolvency can take advantage of a new style moratorium under CIGA to pursue a rescue plan, whilst preventing creditors from taking action against them for an initial period of 20 business days.
- Suspension of Wrongful Trading:
Under CIGA, directors are granted enhanced protection whilst attempting to keep the companies they run afloat during the pandemic, as the threat of personal liability for wrongful trading is temporarily removed. Under the new measure, there will be a presumption that directors are not responsible for any worsening of a company's financial position during the period of 1 March 2020 to 30 September 2020.
Originally published 10 July, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.