The CIGA: New insolvency procedures & adjudication in the construction industry
The Corporate Insolvency & Governance Act 2020 (CIGA) introduces significant change to corporate insolvency law and is intended to assist struggling companies during the Covid-19 pandemic.
Our first article on the CIGA analysed the impact of the CIGA on termination and 'Ipso facto' rights within construction contracts.
In this article, we focus on the two new restructuring and insolvency procedures introduced by the CIGA, and their impact on the construction industry and rights to commence adjudication in particular. The new procedures are (i) the new company moratorium and (ii) the new restructuring plan.
The CIGA provides for a 20 business day moratorium (subject to extension to a maximum of 40 business days) for eligible struggling companies, to allow them time and space to restructure and/or seek investment.
A company that is able to invoke the protection of the new moratorium:
- Will enjoy the benefit of a 'payment holiday' for debts that have fallen due before or during the moratorium period;
- Cannot be placed into insolvency proceedings during the moratorium period (unless its directors instigate this process); and
- Cannot be subject to a legal process including litigation proceedings without permission of the Court, subject to exceptions such as employment disputes.
A big difference of the new moratorium compared to traditional insolvency procedures such as liquidation or administration is that the directors of the company are able to retain day-to-day responsibilities for running their business. The moratorium will be overseen by an insolvency practitioner, and will end if the company subsequently enters into liquidation or administration.
Does the new moratorium prohibit adjudication?
The vast majority of formal disputes in the construction industry are referred to adjudication for determination. As this moratorium prohibits "legal processes", it could be argued that this would prevent a company from exercising its statutory right to refer a dispute with an insolvent company to adjudication 'at any time' under section 108 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act).
The Courts have yet to confirm whether the new moratorium process prohibits a party from commencing an adjudication against a company that has obtained the protection of a new moratorium.
It may be that the Courts adopt a similar approach to that which has been taken in respect of adjudications involving companies subject to an administration moratorium under previous insolvency legislation. In A Straume (UK) Ltd v Bradlor Developments Ltd (1999), and confirmed in Canary Riverside Development v Timtec International (2000), the Court decided that a party was prevented from referring a dispute with an insolvent counterparty to adjudication without the Court's permission.
However, recent case law (and in particular the Supreme Court's landmark judgment in Bresco v Lonsdale (2020); albeit that particular case considered the right of an insolvent company to bring an adjudication, and not the right of an insolvent party to seek to invoke the protection of a moratorium to avoid an adjudication being brought) appears to indicate that the Courts will continue to champion adjudication through both permitting and enforcing adjudications, even where one of the parties is insolvent.
In Bresco v Lonsdale, the Supreme Court was emphatic in rejecting the suggestion that adjudication in the context of insolvent parties was an "exercise in futility". It remains to be seen whether the Courts will take their lead from this guidance if called upon to consider whether a new moratorium prevents an adjudication being brought against an insolvent party.
New moratorium & termination of supply contracts
A company subject to the new moratorium falls within the CIGA's definition of 'insolvency' and therefore enjoys the benefit of section 14 of the CIGA.
As discussed in detail in our previous article, section 14 of the CIGA prevents (subject to exceptions) a supplier company from exercising contractual termination or 'ipso facto' rights where the customer company becomes insolvent.
This means that a company subject to the new moratorium should benefit from protection from the termination of its supply contracts, and be entitled to the continued supply of goods and services.
New restructuring plan
In addition the new moratorium, CIGA also introduces the concept of a new restructuring plan (RP) being put in place for a company that "has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern".
The CIGA introduces a new Part 26A into the Companies Act 2006 (CA 2006), which builds on the existing 'scheme of arrangement' framework under Part 26 of the Companies Act 2006. The RP is designed to provide a mechanism for struggling companies to come to an agreement with its creditors (or members of any class of them) regarding its liabilities. Importantly, the RP can bind both secured creditors and unsecured creditors.
Significantly, the Court has powers to sanction the approval of an RP even where there are dissenting creditors in the class through the 'cross-class cram-down procedure'.
The Court may sanction an RP despite dissenting creditors if:
- 75% or more in value of the class agree to the proposed RP: and
- The dissenting creditors would be 'no worse off' under the RP than in the “relevant alternative” (i.e. whatever the court considers is most likely to happen if the RP is not sanctioned).
In light of the above protections, struggling companies may perceive an RP as a viable alternative to, and a way to avoid, the more formal insolvency procedures of litigation and administration.
New restructuring plan & adjudication
Part 26A of the CA 2006 does not prohibit creditor action against a struggling company during the time where an RP is being formulated. This means that, in the context of a construction dispute, there is nothing to prevent a creditor from commencing proceedings (likely an adjudication) against a struggling company before the RP is approved.
Companies considering seeking to implement an RP should be mindful of this, and ensure that they act promptly in formulating and circulating the RP to its creditors.
New restructuring plan & termination of supply contracts
A company that is subject to an RP would fall within the CIGA's definition of 'insolvency' and therefore enjoys the benefit of section 14 of the CIGA; i.e. protection from termination of its supply contracts.
This means that a company that is subject to an RP will, subject to exceptions, continue to be supplied with vital good and services to enable it to continue trading.