Corporate Insolvency and Governance Act 2020 and construction contracts
The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on 26 June 2020 in order to help businesses in the wake of the Covid-19 pandemic. CIGA introduces both temporary and permanent changes to the rights of insolvent and struggling businesses. Some of the key points which will be of particular interest to the construction industry are set put below.
Restriction on statutory demands and winding up petitions
There is a restriction on the use of statutory demands and winding up petitions, which is a temporary measure currently drafted to apply retrospectively from 1 March to 30 September 2020. This aims to provide some breathing space for companies in respect of current Covid-19 related debts.
Prohibition on termination
- A supplier (such as a contractor or sub-contractor) will not be able to exercise any contractual right to terminate during the client's insolvency period if:
- the contractual right arises as a result of the client entering into insolvency proceedings; or
- the contractual right arose before the start of the client's insolvency, but was not exercised before the client's insolvency.
Provisions in the contract that provide for automatic termination or allow the contractor to terminate will cease to have effect. This could mean that contractors become locked in to contracts with insolvent counterparts.
There are a number of exceptions to this prohibition on termination. The supplier may still terminate if:
- the right to terminate arose during the insolvency period and was not due to the client's insolvency;
- the client or the insolvency office holder consents to the termination;
- the supplier is a "small entity" as defined by CIGA (albeit that this is only a temporary exclusion).
Although CIGA restricts contractual rights, it does not expressly refer to statutory rights such as s122 of the Construction Act which contains a statutory right for the supplier to suspend performance when a payment or notified sum has not been paid by the client after seven days' notice.
CIGA also provides for a 20 business day moratorium (subject to extension to a maximum of 40 business days) to allow some breathing space in order to explore any rescue or restructuring options.
During this moratorium, an eligible company:
- will have the benefit of a 'payment holiday' for debts that have fallen due before or during the moratorium period
- cannot be placed into insolvency proceedings unless its directors instigate this process
- cannot be subject to a legal process including litigation proceedings, subject to exceptions such as employment disputes
It could be argued that 'legal processes' includes adjudication, which would mean that a supplier is prevented from exercising its statutory right to adjudicate under section 108 of the Construction Act against an insolvent client. However, the Courts have recently enforced adjudications in cases of administration where a statutory moratorium is in place under the Insolvency Act 1986, and it may be that a Court would adopt a similar approach in order to reinforce the "unique" status of adjudication in the construction industry.