Construction industry: Impact of new insolvency provisions
The Corporate Insolvency and Governance Act (CIGA) is the latest piece of legislation enacted by the government to try and assist businesses suffering because of Covid-19.
CIGA came into force on 26 June 2020. However, the construction industry is likely to have mixed feelings about the introduction of this new piece of legislation.
An effect of CIGA is to limit the ability suppliers have to terminate ongoing supply arrangements when a customer has entered formal insolvency procedures. It is not uncommon for contracts, subject to English Law, to contain clauses that provide a supplier with the right to:
withhold supplying future services
crystallise any debt if a customer enters insolvency proceedings.
In many cases, a supplier would see this as an important protection, as it prevents them from potentially suffering greater exposure to a struggling client. However, such clauses are often seen to jeopardise attempts to rescue the business that is suffering financial distress and aggravate its situation.
Many JCT contracts contain provisions enabling the contract to be terminated if an insolvency event occurs. Insolvency events are defined within the JCT contract but may include an employer entering administration, for example. The effect of CIGA would now, subject to certain exceptions, be impossible to enforce by a contractor. The exception is if the contractor is a small company which means meeting two of the three following criteria:
the supplier’s turnover was not more than £10.2 million
the supplier's balance sheet total was not more than £5.1 million
the number of the supplier’s employees was not more than 50
A small supplier can rely upon insolvency clauses in a contract and may therefore cease to continue to supply services. The exemption only applies until 30 September, after which small suppliers will also be subject to the changes implemented by CIGA.
It is important to note that the exemption from terminating a contract only applies to insolvency procedures. This means the contract can still be terminated if a customer is in breach of a supply contract for other reasons, for example health and safety failures. Of course, any termination provisions will be specific to each individual contract and would need to be given careful consideration before any action is taken.
If you are concerned about the impact of CIGA on your contracts, please contact Tim Field at Birkett Long on 01206 217366.