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Oliver Price

Expert opinion: New insolvency act should help businesses struggling through pandemic

Since 26 June 2020 the UK has been subject to the Corporate Insolvency and Governance Act 2020, which was introduced in an effort to lessen the impact of Covid-19 upon struggling businesses, and has altered the legislative landscapes concerning insolvency, the supply of goods and services, and director liability.

Termination clauses

CIGA restricts suppliers of goods or services – it does not apply to customers whose supplier has become insolvent – from terminating or changing their agreements (eg to demand immediate payment of sums due before making any further delivery) where the customer has entered into certain insolvency procedures, including upon the appointment of a liquidator.

The rationale behind the change is that insolvent companies should not face further hardship as they attempt to rescue their business. The supplier will be unable to terminate the agreement, or stop providing further goods or services, after the insolvency procedure has started even if the customer fails to pay invoices due before the insolvency event.

There are a number of actions that can be taken to mitigate the effects of the new Act:

  • Consider reducing your credit terms to provide that you can terminate an agreement at an earlier stage. Termination prior to an insolvency event is still allowed. Also consider (particularly in relation to large value contracts) making payment in advance a pre-requisite for delivery as a matter of course.
  • Reviewing your credit control procedures to consider termination as soon as evidence arises of a customer’s financial difficulties.
  • Consider having shorter term contracts or a series of contracts – termination is only not allowed if the insolvency event automatically triggers a termination. A contract which comes to the end of its term will not be caught by these new provisions.
  • Review your terms and conditions to ensure you have the best possible protection. In particular reviewing your termination provisions in your present terms and conditions to ensure that any other grounds of termination other than for an insolvency procedure are preserved.

Wrongful trading liability

Prior to CIGA, wrongful trading provisions under the Insolvency Act 1986 imposed the threat of personal liability upon directors who continued to trade and made losses, when they knew, or ought to have known, that the business stood no reasonable chance of avoiding insolvent liquidation.

CIGA has the effect of changing the way in which the courts will interpret the financial position of the company and the impact of the Covid-19 pandemic.

In dealing with wrongful trading claims, the courts will start with an assumption that between 1 March 2020 and 30 September 2020, a deterioration of the company’s financial standing resulted from the pandemic, as opposed to the wrongful actions of the director.

Despite the introduction of CIGA, directors remain bound by their fiduciary duties to companies and will need to remain wary of continuing to trade if insolvent liquidation is possible.

If you have any concerns that you or another director has been wrongfully trading, advice is available as to any liability attributable to those actions.

Oliver Price is managing partner, and head of the commercial team, at Wansbroughs www.wansbroughs.com