Corporate Insolvency and Governance Act 2020: Wide protections for insolvent companies give construction suppliers limited room to manoeuvre

10th December 2020

The Corporate Insolvency and Governance Act 2020 (CIGA) provides wide protections to insolvent companies and significant restrictions on suppliers to them, some of which are temporary (and respond to Covid-19), and others permanent. With the continuing effects of Covid-19 and financial strain on businesses, the permanent elements of CIGA are likely to have increasing relevance within the construction industry and the market generally.

What does it do?

CIGA aims to protect companies entering insolvency proceedings by placing significant restrictions on what suppliers of goods and services can do in response.

In particular, in the event of client/customer insolvency, CIGA:

  • prevents suppliers from exercising any existing right to terminate – any such rights “cease to have effect”
  • further prevents suppliers from doing or allowing ‘any other thing’ in response to customer’s insolvency – this is deliberately extremely wide
  • prevents suppliers from putting conditions upon their continuing supply of goods or services.

These restrictions only apply ‘downstream’ and are not afforded to suppliers that are undergoing insolvency proceedings themselves.

However, one of the temporary provisions under CIGA (currently effective until 30 March 2021) means these [ipso facto] provisions do not apply to “small” suppliers; to qualify as small, the supplier of the goods and/or services must fall within two of the following three categories – have a turnover of less than £10.2m, have a balance sheet of not greater than £5.1m or have no more than 50 employees.

Otherwise, for other non-small suppliers, the rather wide scope of doing or allowing ‘any other thing’ to happen is intentional. It takes particular aim at ransom payments and retention of title, but could affect other everyday features of construction projects, such as operation of step-in rights and the statutory right to suspend under the section 112 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act).

CIGA also provides for a new moratorium protection for eligible companies. This may be obtained by application to the court, without having to proceed to a formal insolvency process.

What does this mean for me?

All contractors, consultants and sub-contractors will constitute suppliers for the purposes of CIGA. They will all need to consider both (i) what options are available in the event of customer insolvency under existing contracts, and (ii) what changes should be made to new contracts.

With existing contracts, in the event of customer insolvency, you will need to consider:

  • if/when can you suspend performance?
  • can you terminate other than as a direct consequence of the insolvency and, if so, when?
  • are you eligible to cease supplying on the grounds of ‘supplier hardship’, as provided under CIGA?
  • can you accept a funder or employer stepping into your contract?
  • do you fall within the exemption for small suppliers under CIGA (currently available until 30 March 2021)?
  • in what circumstances can you adjudicate disputes?
  • commercially, might it be worth taking the risk of ceasing supply anyway?

With new contracts, what changes can be made:

  • to termination provisions to allow wider termination rights in lieu of the right to terminate for customer insolvency?
  • to the step-in provisions to ensure that they may be operated in the event of customer insolvency, as intended?

How can we help?

Although the provisions of CIGA are particularly restrictive, suppliers are not completely restrained.

We can assist, guiding you through the options available to you in the event of customer insolvency and possible changes to your contracts going forward, in order to minimise your commercial risk, whilst remaining within the legal constraints of CIGA.

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