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Posted October 16, 2020 | Published in Contracts & documentation

The CIGA saga: CIGA insolvency provisions extended

In July 2020, when COVID-19 still seemed like a relatively new topic, I published an article that set out in detail the reforms brought in by the Government – partly to try to tackle the impact of COVID-19 – in the Corporate Insolvency and Governance 2020 (“CIGA”). 

CIGA introduced a mixture of temporary and permanent measures that were intended to provide “breathing space” to businesses who were struggling financially (possibly as a result of the COVID-19 crisis). At the time, the restrictions brought in by CIGA preventing the presentation of winding-up petitions and exempting some companies from relying on termination clauses were only intended to last until 30 September 2020. However, as a result of The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 which came into force on 29 September 2020, winding-up petitions cannot be presented until after 31 December 2020 and small suppliers remain exempt from the prohibition on termination clauses until 30 March 2021. 

Recap on the key points of CIGA 2020

There is a mixture of temporary and permanent provisions in CIGA. I focus on two of these: 

Temporary measures – winding-up petitions

Schedule 10 of CIGA (as updated) has placed a temporary restriction on the ability to commence winding-up proceedings based on a statutory demand that was served on a company in the period between 1 March 2020 and 31 December 2020.  A winding-up petition may not be presented unless there are “reasonable” grounds for believing that (1) Coronavirus has not had a financial effect on the company, or (2) that the relevant grounds for the petition would apply even if Coronavirus had not had a financial effect on the companyWhile this does not result in a complete ban on winding-up petitions, in practical terms it will be very hard to meet the Act’s requirements to present a petition.

Permanent measure – ban on termination for insolvency clauses in supply contracts

The new provision means that suppliers of goods and services to an insolvent company are no longer able to rely on a contractual right to terminate or to “do any other thing” that arises because the company that it is supplying has become subject to a “relevant insolvency procedure” (defined at 233B (2) IA 1986 to include administration, liquidation and a new “moratorium” procedure). Further:

  • the supplier is also prevented from terminating if the right to terminate had arisen before the company entered into the relevant insolvency procedure; and
  • a supplier is prohibited from making payment of outstanding charges a condition of any further supply of goods and services when the company becomes insolvent.

It is easy to see that, in a construction context, subcontractors and suppliers will fall within the definition of being “suppliers of goods and services” to companies immediately above them in the supply chain. Unless they fall within the limited scope of exemptions to the ban which have been extended until 31 March 2021, they will be forbidden from using their contractual right to terminate in the event that the company they are supplying enters into an insolvency procedure (as will be seen below, such rights are usually reciprocal under the common standard forms). This leaves the subcontractor or supplier in a position where they have to keep working or supplying goods and materials to a company that they know is insolvent. In a cash-tight industry, this is not an attractive prospect.

" As a result of The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 which came into force on 29 September 2020, winding-up petitions cannot be presented until after 31 December 2020 and small suppliers remain exempt from the prohibition on termination clauses until 30 March 2021. "

Note, however, that CIGA does not prevent a party higher up the supply chain from exercising its contractual right to terminate in the event that one of its suppliers enters insolvency. For example, a main contractor can still rely on a contractual termination clause in relation to its insolvent subcontractor, but if the main contractor becomes insolvent, its subcontractor cannot terminate. An interesting question, which has yet to come before the courts, will be how this ban on terminating or doing “any other thing” by reason of the receiving company’s insolvency interacts with the statutory right of suspension for non-payment under the Construction Act.

What have we learnt over the past few months?

There can be no denying that CIGA will have had an impact on the financial viability of some companies, and the temporary restriction on winding-up petitions is likely to have helped buy them some time. This is perhaps best demonstrated by the fact that very little case law has emerged since CIGA came into force.

However, the unreported case of Re: Tundrill Limited may be some relief to many creditors worried about the broad nature of the restrictions on winding-up petitions introduced by CIGA and the latest extension of their application. In that case, a petition was issued on 1 May 2020 by a creditor. Whilst this petition was eight weeks before the formal introduction of CIGA, the retrospective nature of the Act meant that, at the time the petition was presented, the petitioner did not meet the requirements under CIGA for the petition to be presented. However, the petitioner argued that although the underlying debt had only been assigned to the petitioner in March 2020, the debt itself dated back to April 2019. As a result, the debt pre-dated the Coronavirus pandemic and, by reference to filed accounts, the business had been insolvent since 2018. The Company disputed this but was ultimately unsuccessful. 

In giving his judgment, Judge Mullen acknowledged CIGA and the restrictions it imposed, noting that he could only order a winding-up petition where Coronavirus had had no financial effect on the company, or the grounds for winding-up would have existed in any event. He concluded that in this case the Company should be wound up. This at least shows that, in the right cases, winding-up petitions can still be used. 

Conclusion

The commercial effect of the Coronavirus pandemic is difficult enough to assess even without continual changes to the legislative landscape. At the time of writing, there is every possibility that the temporary restrictions imposed by CIGA could be extended again. With suppliers having lost one of their key contractual tools for protecting them against insolvent customers (termination on insolvency) and being unable to contract their way out of the effects of CIGA, close cash and credit control will be more important than ever. Going forward, suppliers will have to spend more time at tender stage considering payment periods and ensuring stringent credit checks and due diligence are carried out in respect of their customers.   

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