The impact of the Corporate Insolvency and Governance Act 2020 on the construction industry
The Corporate Insolvency and Governance Act 2020 (the Act) received royal assent on 25 June 2020 and is now in force, bringing with it significant changes to the insolvency world and the operation of the construction industry.
The current COVID-19 pandemic has placed many companies registered in England and Wales into a position where they are now either balance sheet or cash flow insolvency or both. The loss of these companies to the economy would be catastrophic and, as a result, the UK Government started the Bill's passage through parliament on 3 June 2020.
The Act has significant consequences for the operation of the construction industry, particularly in light of the changes regarding termination rights and offering distressed companies time to restructure.
Standard forms of contract such as NEC, and JCT contain clauses allowing contractors to terminate for employer insolvency, and sub-contractors to terminate for contractor insolvency. The implementation of the Act means that these clauses may no longer generally be used by a supplier to terminate, subject to limited exceptions.
The exceptions are as follows - the supplier may still terminate if:
- the right to terminate arose during the insolvency period and was not due to the client's insolvency;
- the client or the insolvency office holder consents to the termination; and
- the supplier is a 'small entity' as defined by the Act (albeit that this is only a temporary exclusion).
In addition, if another termination right exists on the date of insolvency, for example for reasons of default or non-payment, but has not been exercised by then, the supplier will not generally be able to terminate the insolvent party's employment under the contract.
Moreover, regulations have very recently been passed extending the restriction on using statutory demands to initiate winding-up proceedings until the end of the year. A statutory demand served between 01 March 2020 and 31 December 2020 (inclusive) may not be used to justify the presentation of a winding-up petition.
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.