The Corporate Insolvency and Governance Act 2020 (the "Act") represents big changes to the current insolvency legislative framework and potentially to companies who may be affected by an insolvency within their supply chain. It will introduce new protections for insolvent companies against creditors wishing to exercise termination rights within supply contracts and against more aggressive creditor action.
The Act introduces reforms which are intended to be both temporary (as a response to the global coronavirus pandemic) and permanent. These new provisions will be especially welcomed by those in the Retail & Consumer and Hospitality sectors, as these sectors have been particularly affected by the pandemic.
The main changes brought about by the Act are considered in further detail below.
Key takeaways – For companies seeking to rely on the Act
The greater protections for companies facing insolvency introduced by the Act will no doubt be especially welcome in sectors particularly stricken by the coronavirus pandemic, such as the leisure and hospitality industries. For companies seeking to rely on any of the measures outlined above, the following considerations may be of practical benefit:
Key Takeaways – for creditors/ suppliers to assist in minimising financial exposure
However the reforms also provide additional obstacles for creditors and/or suppliers in recovering what they are owed. The following suggestions may assist in minimising both frustration and financial exposure:
Main changes brought about by the Act – the detail
Termination clauses in supplier contracts
Suppliers of goods and services will not be able to exercise insolvency related provisions (also known as "ipso facto" clauses) in their contracts when the other party enters into an insolvency process (including the new processes introduced by the Act itself).
There are certain exceptions to this disapplication of the supplier's rights:
There are already provisions similar to this in relation to critical suppliers in existing legislation but the Act proposes to extend this to all suppliers and is similar to provisions contained in US Chapter 11 proceedings.
There are also temporary exceptions relating to small suppliers.
A distressed company which can realistically be rescued as a going concern, can obtain a 20 business day moratorium from creditor action enabling it to consider viable restructuring options or to seek new investment. The moratorium can be extended by a further 20 business days thereafter but any further extensions will require the consent of the Court or the company's creditors.
This is similar to the moratorium in administration which grants companies protection from creditor action.
Winding up petitions
Winding up petitions presented on or after 27 April 2020 based on a statutory demand served in the period between 1 March 2020 and 30 September 2020 will be prohibited.
Further, and more generally, a winding up petition cannot be presented against a company between 1 March 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that:
These provisions are retrospective from 27 April 2020 and are temporary.
New restructuring procedure
A new restructuring plan similar to existing schemes of arrangement under the Companies Act 2006 is to be introduced. The new plan is modelled on the scheme of arrangement and requires 75% in value of creditors to approve, however, the Court can bind certain dissenting creditors.
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Travelodge Hotels Limited v Prime Aesthetics Limited, Prime Hotels Limited, Orbital Estates Limited  EWHC 1217 (Ch)
Re Saint Benedict's Land Trust Ltd; Re Shorts Gardens LLP Harper v Camden London Borough Council and another; Shorts Gardens LLP v Camden London Borough Council  All ER (D) 159 (Apr).