The Impact Of The Corporate Insolvency And Governance Act 2020 On Construction Contracts

Nigel GreenawayDirector - Corporate, Greenaway Scott

The Corporate and Insolvency Act was introduced by the UK Government on 26 June 2020. It contains a range of permanent and temporary measures, with most of the temporary ones retrospectively taking effect from 1 March 2020. The Act seeks to provide flexibility to businesses suffering financially due to the coronavirus pandemic.

The Act also introduced S233B into the Insolvency Act 1986 (IA 1986), which applies to the construction industry and associated supply chain contracts. Here Greenaway Scott considers the impact of the Act on such construction contracts.

Moratorium overview

The Act introduced the new moratorium which provides companies with a longer period of time to restructure their finances to ensure the continuation of their business. The moratorium will last 20 business days, but the directors of the company will have the opportunity to request an extension of a further 20 business days through a court order.

The moratorium will support businesses through restricting the enforcement of debts owed by a company. The moratorium will apply only to debts for goods or services that occurred before the moratorium but it will not include debts for goods and services supplied during the insolvency period.
All companies are eligible to apply for the new moratorium with the exception of companies who during the 12 months prior to the date of the filing, have been subject to a moratorium or have been involved in a CVA or administration.

Termination clauses in contracts for supply of goods and services

S233B IA 1986 was introduced with the specific aim of protecting the supply of goods and services to companies within the construction sector that enter into insolvency proceedings. This is achieved by preventing suppliers from doing the following:

  • Termination by reason of the insolvency proceedings. The supplier is prevented from terminating a contract or the supply of goods and services to a customer due to them entering into insolvency proceedings. This means that any termination clause in a contract which allows for automatic termination or termination with notice in the event of insolvency ceases to have effect.
  • Requiring further payments. The supplier is prevented from requiring further payments from the company for the continuation of the supply of goods or services.
  • Termination for pre-insolvency breach. S233B prevents a supplier from exercising a contractual right to terminate during the insolvency proceedings due to a breach which had occurred prior to it;
  • Withholding future goods or services. The Act prevents a supplier from demanding that future goods or services will not be provided unless pre-insolvency proceeding debts have been satisfied. This demand must take place during the insolvency proceedings to be prevented; and
  • Ceasing supply due to outstanding payments. Lastly, a supplier is prevented from ceasing the supply of goods or services due to outstanding debts that occurred prior to the insolvency proceedings. This is the case even if the supplier is owed a substantial amount of money but the company remains liable for such sums upon expiry of the insolvency period.

It is important to note here that S233B does not apply to suppliers who enter into insolvency proceedings under the new Act.

Statutory demands and winding up petitions

The Act also introduced restrictions on the ability of creditors/suppliers to file statutory demands, which further prohibits winding up petitions for companies in financial difficulty due to Covid-19. This is applicable to all statutory demands presented between 1 March 2020 and 30 September 2020 and prevents them forming the basis of a winding-up petition presented at any point after 27 April 2020.

It is important to highlight that creditors/suppliers will still be able to file statutory demands and winding up petitions if they can prove that the financial difficulties of a business are not due to the pandemic, but due to other financial reasons.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our commercial team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.