On Wednesday (20 May 2020) the Government published its latest effort to counteract the effects of the COVID-19 pandemic in the form of the Corporate Insolvency and Governance Bill 2019-21. The Government’s aim is for this Bill to receive Royal Assent in June.
The Bill provides for various amendments to the Insolvency Act 1986 (IA 1986) and the Companies Act 2006 (CA 2006) which will impact on businesses seeking to take action to recover debts from struggling companies.
In our view the most significant of these amendments is the change to the use of termination clauses in supply contracts.
In future, with some limited exceptions, where a company has entered into an insolvency or restructuring procedure or obtains a moratorium, the company’s suppliers will not be able to:-
- rely on existing contractual terms to stop supplying the distressed company;
- vary the contractual terms with the distressed company; or
- require payment of outstanding pre-insolvency charges as a condition of continuing supply.
In addition, if a supplier was contractually entitled to terminate the contract or supply before the company entered into the insolvency process as a result of an event which occurred prior to the insolvency process, the supplier cannot exercise that termination right once the company has entered the insolvency process. There is a limited temporary exclusion for suppliers classed as a “small entity” meeting two of the following conditions:- (a) turnover not more than £10.2 million, (b) balance sheet total not more than £5.1 million (c) not more than 50 employees. This exclusion will last until the later of 30 June 2020 and a month after the legislation comes into force.
It will also be possible to activate the clause if the Insolvency Practitioner involved agrees or if it can be demonstrated to the court that the supplier would suffer hardship id supplies continued, but this of course will require an application to be made to the court and additional cost.
The intention is to assist companies which are seeking a rescue package and the effect will be to render a number of standard contract termination provisions irrelevant as “termination for reason of insolvency” clauses are routinely included in commercial agreements and standard terms and conditions of business.In so doing it shifts a burden of risk on to the supplier and businesses should review their standard terms and conditions as well as their due diligence and monitoring procedures in relation to customers to minimise any potential negative impact.
Other changes include:-
- temporarily easing regulatory requirements on companies by extending filing deadlines and enabling companies to hold closed annual general meetings and to conduct business and communicate with members electronically;
- introduction of a new statutory moratorium process designed to provide companies with breathing space from creditors for an initial period of 20 business days but may be extended without creditor consent for a further period of 20 business days and with creditor consent or by the court for up to a year or more;
- introduction of a new restructuring plan, procedurally similar to a scheme of arrangement, under which solvent and insolvent companies will be able to propose a plan to creditors. 75% in value of voting creditors in each class would be required to approve but there will be provisions allowing the court to confirm a plan even where a class of creditors has voted against it;
- temporarily removing the threat of personal liability for wrongful trading from directors by ignoring the period from 1 March 2020 until the later of 30 June 2020 or one month after the Bill comes into effect when assessing the amount of compensation payable; and
- temporarily restricting the presentation of debt-related statutory demands and winding-up petitions (widened to include all petitions and not just those issued by landlords in respect of rent arrears) unless the creditor has reasonable grounds for believing that the coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway.
If you would like advice on the new legislation and what it may mean for your business please contact Alison Brennan on 01244 354815 or at alison.brennan@dtmlegal.com.
