On 10 November 2020 we held a webinar as part of the IHL series looking at the Corporate Insolvency and Governance Act which came into force in the summer.
During the session our panellists outlined the new rules and gave some practical tips for contracts, and other useful steps to think about.
You can watch the webinar below:
Set out below are the key takeaway points:
Corporate insolvency – The new rules
The Corporate Insolvency and Governance Act 2020 (or CIGA for short) came into force on 26 June 2020.
it introduced a new form of company moratorium, which sits outside of the insolvency regime and which can be a precursor to insolvency
it introduced a new restructuring plan, and
it introduced new rules aimed at protecting supplies of goods and services to an insolvent customer.
In this webinar, we also briefly discussed Crown preference.
Why have these changes to insolvency law been made?
The intention is to allow an insolvency practitioner to marshal company assets and prevent one creditor taking advantage over others. In administration—as has been the case since the Enterprise Act 2002—the prime objective is to rescue the company as a going concern and not, say, to punish the company or its directors.
What is the new moratorium?
The feature of the new moratorium is as follows:
there is no need for any existing or subsequent insolvency process
a company can apply for a moratorium of up to 20 days
in cases where a winding up petition has been presented the company needs to apply to the court for the moratorium
an insolvency practitioner is appointed to monitor the moratorium
an extension can be obtained for up to 20 days without creditor consent, and
with creditor consent, the moratorium can last up to a year.
What happens to suppliers during the moratorium?
The effect of the moratorium is typically as follows:
creditors cannot seek to commence any insolvency process against the company
legal process cannot be continued or commenced, save for some types of employment proceedings
most forms of security cannot be enforced save for those relating to basically financial collateral
goods or premises cannot be repossessed
a floating charge cannot be crystallised, and
judgements cannot be enforced.
What happens to payments during the moratorium?
The effect on payments is typically as follows:
the company has a payment holiday in respect of all pre moratorium debts
the company is required to pay for goods and services supplied during the moratorium
the company is also obliged to pay rent wages and salaries, and
payments under financial services contracts, such as a bank loan, are to be paid.
During the new moratorium you potentially may not be able to seek payment for goods and services supplied for up to 40 days. Formal insolvency may or may not follow.
What is the new restructuring plan?
This is a Companies Act 2006 remedy. We don’t anticipate seeing many of these restructuring plans.
The feature of the new restructuring plan is typically as follows:
a new restructuring plan has been introduced which is similar to the existing scheme of arrangement
unlike a scheme of arrangement provisions have been put in place to prevent certain classes of creditor voting against the plan
the court has the ability to approve the plan in circumstances where certain classes of creditors would otherwise have rejected the same, and
if creditors representing 75% in value of one of the classes of creditors approved the plan then it can be referred to the court for sanction.
What has happened to Crown preference?
Although not part of CIGA; the Finance Act 2020, which was passed in July 2020 and which will come into effect on 1 December 2020, reinstates Crown preference for debts owing to HMRC.
Prior to July 2020 the only type of unsecured creditors who could obtain preferential status were employees (preferential status means that the party gets paid after the payment of the secured creditor and the costs of the insolvency and ahead of floating charge holders who are also ahead of unsecured creditors).
This change to Crown preference means the following, in particular:
From 1 December 2020 HMRC becomes a preferential creditor
it applies to tax collected on behalf of HMRC such as VAT and PAYE
it does not, however, apply to assessed taxes such as Corporation tax, and
the direct impact is that HMRC will be paid ahead of both floating charge realisations and unsecured creditors. As a result, we may see a significantly higher number of bankruptcy and winding up petitions presented by HMRC.
What are the new rules protecting supplies of goods and services?
Following CIGA many suppliers may now find it considerably more difficult to terminate or suspend performance of its supply contracts, and to exercise many other standard contractual rights, based on its customer’s insolvency even if those rights are expressly set out in the contract.
The protection of supplies of goods and services introduced by CIGA applies to contracts for the supply of goods and services (including contracts entered into before CIGA) where a customer becomes subject to a relevant insolvency procedure on or after 26 June 2020.
Many standard contractual rights may cease to have effect as a result of CIGA. Generally speaking, this means there can be:
no termination of the contract or supply because a customer has become subject to a relevant insolvency procedure
no doing or taking place of any other thing because a customer has become subject to a relevant insolvency procedure
no termination for pre-insolvency events while a customer is subject to a relevant insolvency procedure, and
no demand for outstanding charges to be paid as a condition of supply after a customer has become subject to a relevant insolvency procedure.
There is little guidance on CIGA at the moment as it was rushed through Parliament at an early stage of the COVID-19 pandemic. There are limited exclusions which will typically require detailed analysis to understand, such as persons involved in, and contracts involving, financial services. There is also an existing regime for essential supplies. Finally, there is a temporary time-limited exception for certain small suppliers.
Whilst this remains unclear and will be a question of fact and circumstances in each case, CIGA may also apply to agreements that are not usually regarded as ‘contracts for the supply of goods and services’.
This may for example cover equipment hire, franchise, agency, distribution, software and intellectual property licences. Similarly, whilst certain agreement (for example licences, property leases and agreements for the sale of land or property) may not be contracts for the supply of goods and services, they may contain an element of supply of goods and services and that element may be caught by CIGA.
For more information, see Shoosmiths’ insight on CIGA here.
What can you do to protect yourself as a supplier?
There are a number of drafting considerations to help protect you as a supplier:
clauses that may cease to have effect as a result of CIGA; in particular, consider:
whether these may be useful to retain
if a supplier seeks to rely on these clauses it could find itself in breach of contract and for example liable for wrongful termination / damages etc.
legal advice before relying on or exercising any rights where a customer is in financial distress.
termination provisions; in particular, consider:
termination for pre-insolvency steps or any action taken before or in the lead up to a customer becoming subject to a relevant insolvency procedure
termination if a supplier reasonably believes an insolvency or pre-insolvency event is about to occur
termination if a supplier reasonably believes its customer’s financial position deteriorates to such an extent that the customer’s capability to adequately fulfil its obligations under the contract has been placed in jeopardy
termination for convenience
termination for non-insolvency related events
termination for non-payment
having shorter notice periods for termination.
suspension of supplies;
retention of title;
reporting requirements; in particular, consider:
obligations on a customer to notify a supplier immediately any steps are taken or threatened with a view to any pre-insolvency or insolvency event
obligations on a customer to provide regular financial information and attend meetings on financial status
rights and remedies required as a result of such notifications, information and meetings.
payment provisions; in particular, consider:
tightening payment structures, for example, payment or part payment in advance; payment by instalments; reducing payment periods; reducing periods for remedying non-payment
payments immediately due and payable on termination
letters of credit
parent company guarantees
how you structure your commercial arrangements; in particular, consider:
framework arrangements or structuring the arrangement as a series of separate contracts that a supplier is free to decline
suitable alternative trigger events (ie, not relevant insolvency procedures), for example, retention of title or step-in rights
shorter contract terms
reducing contract volume
ensuring you can refuse to renew existing contracts
supporting clauses; in particular, consider:
rights and remedies
duty of rationality.
What practical steps should you be thinking about as a supplier as a result of CIGA?
You should consider the following:
review your existing contracts
amend your standard form templates
address, as appropriate, any CIGA concerns in all future contract negotiations
review your approach to managing contracts and mitigating insolvency risk
consider much more active contract management procedures
undertake greater due diligence on customers pre-contract
undertake greater due diligence on customers throughout the lifetime of the contract
train employees who manage contracts
have a good working knowledge of material customer contracts (so that you are familiar with your rights if a customer shows signs of financial distress)
promptly exercise contract rights, as appropriate
actively monitor each customer’s payment performance and financial position
ensure invoices are paid when due
tighten debt collection procedures
review insurance cover
invoice finance options and trade credit insurance
legal advice before exercising any rights where a customer becomes subject to a relevant insolvency procedure
This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.