The New Insolvency Rules

What Changes Were Made to the Insolvency Legislation?

The Corporate Insolvency and Governance Act 2020 ("CIGA") was brought in to relieve the burden on businesses during and after the Covid-19 pandemic. It amended the Insolvency Act 1986, with the aim of allowing a company which is facing potential financial difficulties and considering restructuring, to do so, without having its contracts terminated in the process.

This essentially allows the company some breathing room to restructure and consider their options, similar to a stay in proceedings.

The insolvent or soon to be insolvent company applies to Court for this and a licensed insolvency practitioner needs to consent, monitor and confirm if they believe the company can be rescued as a going concern following the moratorium period.

If granted it will run for an initial 20 business days which can be extended by a further 20 business days by the directors. Further extensions can be agreed by either the Court or company's creditors.

Supply of Services

Section 233B CIGA make two important changes to contracts for the supply of goods and services:

• Suppliers of goods and services are prevented from exercising certain rights of termination against a 'company' that is going through a relevant insolvency procedure; and

• Suppliers must continue to supply goods and services even if they have not been paid for goods and services already delivered.

This effectively means that suppliers (such as Contractors) are prevented from terminating due to the Employer insolvency. The Supplier must continue to provide its services regardless.

However, the same does not apply to the customer; for example, where the Contractor becomes insolvent, the Employer still retains its right to terminate the Contractor's employment under the contract and CIGA doesn't change this position.

The term 'Supplier' can cover subcontractors too, and in that instance, a party higher up in the supply chain is still able to exercise the contractual right to terminate i.e. a main Contractor can still rely on the termination clause for an insolvent subcontractor, but if the Main Contractor becomes insolvent, the Subcontractor cannot terminate.

Impact on Construction Contracts

The result of the new legislation is that where there is a provision in a contract allowing a supplier, such as a Contractor, to terminate because their counterparty is insolvent, that provision is unenforceable under UK law.

The JCT D&B 2024 retains the same wording as in the 2016 version, allowing the Contractor to terminate, and has not been updated in line with the new legislation which may be problematic. As such, if you are using a JCT contract in the UK it is important to amend it to deal with this particular issue.

Exceptions to the New Termination Rules:

• Section 15 of CIGA sets out that "small suppliers" are exempt. This includes companies which meet two of the following:
  1. having a turnover of less than £10.2 million;
  2. having a balance sheet total of less than £5.1 million, and/or
  3. having fewer than 50 employees that may not be able to afford continuing to supply goods and services without payment;

• An insolvent company (or the insolvency office holder) consenting to terminate contract; and

• Following the application of the supplier, a Court being satisfied that continuing the contract would cause the supplier "hardship", so they should be allowed to terminate the contract.

Considerations Going Forward

Due to the new restrictions in relation to insolvency, we suggest that parties consider expanding upon the termination rights available, aside from insolvency such as a 'termination at will' clause allowing a party/parties to terminate following required notice or cementing the right to terminate for non-payment.

It is also important to carry out due diligence as to the other contracting party's financial position and continue to monitor their accounts, such as on Companies House in the case of a Company, and consider the impact on their potential insolvency.