On 20 May 2020, the UK Government published the Corporate Insolvency and Governance Bill (“CIGB” or the “Bill”) which proposes several changes aimed at improving the chances of company rescue and better overall returns for creditors. One of the proposed changes is to restrict parties’ ability to exercise contractual termination rights where a company enters into an insolvency or restructuring procedure, meaning that for most suppliers and supply contracts a termination clause will be ineffective upon insolvency. This will align the approach in the UK with that of a number of other jurisdictions.
These clauses can be referred to as “ipso facto” clauses; ipso facto translating to ‘by the very fact’. This extrapolates to situations where a party seeks to terminate a contract by the very fact of insolvency.
What are the proposed changes?
The CIGB renders ineffective the rights of a supplier to terminate a contract or “any other thing” (e.g. amending payment terms) when a company enters into insolvency for the duration of the procedure.
An “insolvency procedure” includes (but is not limited to) a new-style company moratorium provided for in the CIGB, administration, liquidation, company voluntary arrangements (“CVAs”) and administrative receivership. Even if a right to terminate arose prior to the company entering into insolvency, if it was not exercised by the supplier prior to that time, then it will be suspended for the duration of the insolvency procedure. Suppliers will therefore have to think carefully when a right to terminate arises about to whether to assert this right or potentially risk losing it temporarily.
The Bill also prevents suppliers from requiring a company to pay outstanding charges (or anything of the same effect) as a condition of them continuing the contract or supply. This will prevent suppliers demanding “ransom payments” from companies – something which has not been uncommon in administrations in particular. The restrictions work in consort with other measures brought in by the Bill such as the new moratorium and restructuring plan procedure which aim to improve the rescue opportunities available to distressed companies.
These proposals do not interfere with current provisions protecting the supply of essential services. Although both sets of provisions are designed to protect a company’s supply of goods and services whilst in insolvency, it is notable that the protection of a personal guarantee from the office-holder available to some essential suppliers is not proposed under the new provisions. However, other protections are available as discussed below.
Protection for Suppliers
A supplier can apply to the court to terminate its contract if it will cause it hardship – however no definition of this is provided – so it will be interesting to see how this is dealt with by the courts. A supplier can also terminate if, in relation to an administration, an administrative receivership or a liquidation, the office-holder consents or, in respect of any relevant insolvency procedure, the company consents.
Suppliers will still be able to terminate if their right to do so arises after a company has entered into the procedure, for instance, on the basis of non-payment. This protects the supplier from the obligation to continue the contract if there is a further breach.
The provisions in the Bill do not guarantee that the supplier will get paid but the general provisions of the insolvency legislation and practice are likely to ensure suppliers get paid during this period of ongoing supply.
Exemptions apply to certain entities whether they themselves are in distress or supply a company in distress. These largely include financial services entities such as deposit-taking and investment banks and insurance companies.
The exemptions also cover specific types of financial contracts such as loan agreements, financial leasing, securities agreement and swap agreements. It is clear that the provisions therefore distinctly apply to the supply of goods and services and not to for example a rolling credit facility. Carve-outs are provided for specific financial markets products and set-off and netting is preserved.
A full list of exempted entities and contracts is provided at [Appendix 1] / [Here].
A temporary exemption will be in place for small suppliers from the date of the enactment of the Bill until either one month after that enactment or 30 June 2020, whichever is the later, due to the impact of Covid-19. Whether a supplier is regarded as “small” will be determined by its number of employees, its turnover and its balance sheet total.
The CIGB clearly erodes some important protections and leverage currently available to suppliers by replicating some existing restrictions on termination more widely to suppliers of goods and services and preventing suppliers from demanding ransom payments or making the continuation of the contract dependent upon overdue charges being paid. However, the intention is that suppliers and creditors are likely to benefit if the company or its business is rescued.
Suppliers will need to review whether this may require them to change their terms of business to rebalance the risk in the contractual provisions. Should they exercise termination rights earlier? Should they apply to court if they feel “hardship” or are not satisfied they will get paid? Should they seek security or other protection upfront? It will be interesting to see how the structure of supply agreements and the drafting of termination and related provisions develops in response to these changes.
Appendix 1 – Exemptions
- Deposit-taking banks or banking group companies within the meaning of the Banking Group Act 2009;
- Electronic money institutions;
- Investment banks and firms;
- Payment institutions;
- Operators of payments systems, infrastructure providers etc;
- Recognised investment exchanges;
- Securitisation companies;
- Overseas companies which fall within the above categories.
- Financial contracts meaning:
- Financial services contracts consisting of (i) lending; (ii) financial leasing; or (iii) providing guarantees or commitments;
- Securities contracts including (i) contracts for the purchase, sale or loan of a security or group or index of securities; (ii) an option on a security or group or index of securities; (iii) a repurchase or reverse repurchase transaction on any such security, group or index;
- Commodities contracts including (i) a contract for the purchase, sale or loan of a commodity or group or index of commodities for future delivery; (ii) an option on a commodity or group or index of commodities; (iii) a repurchase or reverse repurchase transaction on any such commodity, group or index;
- Futures or forwards contracts, including a contract (other than a commodities contract) for the purchase, sale or transfer of a commodity or property of any other description, service, right or interest for a specified price at a future date;
- a swap agreement, including (i) a swap or option relating to interest rates, spot or other foreign exchange agreements, currency, an equity index or equity, a debt index or debt, commodity indexes or commodities, weather, emissions or inflation; (ii) a total return, credit spread or credit swap; (iii) any agreement or transaction that is similar to an agreement referred to in sub-paragraph (i) or (ii) and is the subject of recurrent dealing in the swaps or derivatives markets;
- an inter-bank borrowing agreement where the term of the borrowing is three months or less;
- Master agreements for any of the contracts or agreements referred to in (i) to (vi).
“Commodities” under this section include:
- units recognised for compliance with the requirements of EU Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading,
- allowances under paragraph 5 of Schedule 2 to the Climate Change Act 2008 relating to a trading scheme dealt with under Part 1 of that Schedule (schemes limiting activities relating to emissions of greenhouse gas), and
- renewables obligation certificates issued— (i) by the Gas and Electricity Markets Authority under an order made under section 32B of the Electricity Act 1989, or (ii) by the Northern Ireland Authority for Utility Regulation under the Energy (Northern Ireland) Order 2003 (S.I. 2003/419 (N.I. 6)) and pursuant to an order made under Articles 52 to 55F of that Order.
- Securities financing transactions, within the meaning provided in Article 3(11) of Regulation (EU) 2015/2365 on the transparency of securities financing transactions but, the same as for that Article as for this paragraph, references to “commodities” in that Regulation are to be taken as including the units, allowances and certificates referred to above.
- Derivatives within the meaning provided in Article 2(5) of Regulation (EU) No. 648/2012.
- Spot contracts within the meaning provided in Article 7(2) or 10(2) of Commission Delegated Regulation of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.
- Capital market arrangements within the meaning provided in paragraph 13(2) of Schedule ZA1.
- Contracts forming part of a public-private partnership within the meaning provided in paragraph 16 of Schedule ZA1.
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