Corporate Insolvency and Governance Act 2020: What You Need to Know

The Corporate Insolvency and Governance Act 2020 was introduced to help businesses navigate the challenges of the COVID-19 pandemic. It's a significant piece of legislation that affects companies and their stakeholders.

The Act provides temporary measures to help companies avoid insolvency and continue trading. These measures include a new moratorium period and changes to the insolvency process.

In a nutshell, the Act aims to support businesses and prevent unnecessary insolvency. This is achieved by giving companies more time to recover and restructure their debts.

The Act also includes measures to help companies with cash flow problems, such as the suspension of statutory demands and winding-up petitions.

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The Corporate Insolvency and Governance Act 2020 brought about some significant changes that impact businesses. A new moratorium process has been introduced, which provides a temporary halt to certain legal proceedings.

This new process is designed to give companies breathing room during difficult times. A new pre-insolvency rescue and reorganisation procedure, known as the restructuring plan, has also been introduced.

This plan allows companies to restructure their debts and operations in a more flexible way. The Act has banned the use of termination clauses in commercial contracts on the basis of insolvency.

This change is aimed at preventing companies from being unfairly terminated due to financial difficulties.

The UK Moratorium is a short-term process that gives eligible companies a payment holiday on debts that fell due prior to the moratorium. This is initially 20 business days, but can be extended.

The moratorium prevents the enforcement of security, the bringing of insolvency or other legal proceedings against the company, and forfeiture of a lease. However, the company will still have to pay debts falling due during the moratorium.

A monitor is appointed to oversee the company's affairs and must declare that it is likely that the company can be rescued as a going concern. There is no requirement for the company to know how that will be achieved.

The moratorium can only be used where the directors are of the view that the company is, or is likely to become, unable to pay its debts. A proposed monitor must also be of the view that it is likely that the moratorium would result in the rescue of the company as a going concern.

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Here are the key advantages of the moratorium:

However, there are also disadvantages, including the fact that many debts are excluded from the payment holiday. This includes wages and salary, and if there is a formal insolvency event within 12 weeks of the end of the moratorium, those debts take 'super' priority.

The Corporate Insolvency and Governance Act 2020 has significant implications for both employers and suppliers. If an employer becomes insolvent and enters into an A1 Moratorium, the supplier's ability to terminate the contract is severely limited.

The supplier cannot terminate the contract on the grounds of insolvency, or on any other ground that existed prior to the employer entering into the A1 Moratorium, unless they meet specific conditions.

The supplier must obtain permission from the court if they wish to terminate the contract, which will only be granted if continuing the contract would cause "hardship" to the supplier. Hardship is a vague term, but government guidance suggests it could mean the supplier's solvency is under threat.

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Here are the conditions under which a supplier can terminate a contract if the employer enters into an A1 Moratorium:

If the employer becomes insolvent and enters into an A1 Moratorium, the situation can be complex for suppliers. The supplier will not be able to terminate the contract on grounds of insolvency or any other grounds that existed prior to the employer's insolvency.

The supplier's options for terminating the contract are limited, but there are a few possible scenarios. The appointed administrator or liquidator must agree to the contract being terminated, or the employer who is subject to the insolvency procedure must agree.

In some cases, the court may grant permission for the contract to be terminated if it will cause hardship to the supplier. Hardship could be defined as when the solvency of the supplier is under threat.

To summarize the possible scenarios for terminating the contract when the employer is insolvent, consider the following:

Suppliers still have the right to terminate a contract for repudiatory breach, along with an option to exercise rights to terminate for convenience if this is part of the contractual agreement.

This means that suppliers can take action if their customer's circumstances change, even if the customer hasn't yet gone bankrupt.

Retention of title is a crucial provision for suppliers to include in their contracts, which should be exercisable prior to a customer's insolvency.

This means that if a customer defaults on payment, the supplier can reclaim their goods before the customer goes bankrupt.

Contract terms can be adjusted to reduce the risk of non-payment, and payment terms can be made more transparent and rigorous.

For example, suppliers can consider requiring customers to pay a larger deposit upfront or offering shorter credit periods.

Termination clauses should cover scenarios where non-payment is an issue, and termination for convenience with a short notice period.

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This way, suppliers can quickly respond to changes in their customer's financial situation.

Consider implementing a requirement for customers to provide updated financial information at regular intervals, and include a term allowing termination if this information is not provided or if it raises red flags.

This can help suppliers stay on top of their customers' financial health and take action before it's too late.

Here are some key supplier benefits to keep in mind:

You can't enforce your security without court permission, which is required to enforce any security granted before the moratorium. This includes floating charges, which can't be crystallised during the moratorium period.

Lenders may need to factor this into their credit approval process for new customers, taking into account the possibility of a company filing for a moratorium. If a lender accelerates the loan, making the entire debt payable during the moratorium, the monitor will bring the moratorium to an end unless the company settles the debt.

A lender would then be free to enforce their security in the usual way. If a borrower requests a payment holiday, lenders should consider making any consent to such holiday revocable, in case the company files for a moratorium without their consent.

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The Corporate Insolvency and Governance Act 2020 has introduced significant changes to contractual implications for businesses. The new ipso facto rules restrict contractual termination provisions on insolvency.

Suppliers of goods or services can no longer rely on contractual clauses allowing for termination in the event of the counterparty's insolvency or restructuring. This includes both existing and new contracts.

The new provisions apply to contracts for the supply of goods or services, but not to commercial contracts generally. This means they won't affect customers of the company.

The rules have retrospective effect, applying to any supply contracts entered into before and after the new provisions became law. This means companies can't use pre-existing contracts to terminate supplies due to insolvency.

Suppliers can still terminate contracts for grounds other than insolvency or restructuring, such as breach of contract or default. They can also request personal guarantees from directors.

The new rules don't apply to facility agreements, contracts for loans, leasing, swaps, and other financial services and products. Lenders can cancel non-committed facilities and rely on provisions in facility agreements relating to interest.

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The Corporate Insolvency and Governance Act 2020 has been a game-changer for businesses in the UK. The Act introduced the concept of restructuring plans, which can be a more efficient alternative to traditional insolvency procedures.

Lite restructuring plans, in particular, have gained popularity due to their streamlined nature. The 2025 Practice Statement: Streamlining UK Schemes and Restructuring Plans suggests that it's time to embrace this approach, which can provide a more flexible and cost-effective solution for companies in distress.

Restructuring plans can be a valuable tool for businesses looking to reorganize their finances and avoid insolvency.

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