Introductory matters
The terminology used in this post and the ones that follow it can be confusing. It is important that you get used to using the correct terminology as it will clarify your analysis of insolvency law. I will include a glossary later, for you to refer to as you read this post. I will italicise words that appear in the glossary the first time they are referred to in the body of these posts.
The aim of corporate insolvency law and the rescue culture
Corporate insolvency law relates to failing companies. The underlying aim of corporate insolvency law is to protect and balance the interests of competing creditors and to promote a culture where failing businesses are rescued and can recover. The idea is that creditors are likely to recover more money if businesses can be rescued or restructured than if they are closed down and the assets sold off.
Relevant Legislation
The main relevant statute was until very recently is the Insolvency Act 1986 (the ‘IA 1986’). Although of still of prime importance as a source of insolvency law, the IA 1986 Act must also now share prominence with the Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’) which came into force on 26 June 2020. CIGA has introduced new insolvency procedures into the law of England and Wales and made consequential amendments to the IA 1986.
IA 1986 and CIGA are supplemented by the Insolvency (England and Wales) Rules 2016 (the ‘IR 2016’) which, in the main, deal with procedural matters. These Rules came into force on 6 April 2017 and replaced the Insolvency Rules 1986. The IR 2016 consolidate nearly 30 years’ worth of amendments made to the Insolvency Rules 1986, they restructure and update the language of the Insolvency Rules 1986 and give effect to certain policy changes and changes to the IA 1986.
Unless otherwise stated, section, schedule and rule numbers mentioned in this post refer to sections of and schedules to the IA 1986.
Note that the IA 1986 itself has been substantially amended over the years, in particular by the Insolvency Act 2000, the Enterprise Act 2002 (‘EA 2002’), the Companies Act 2006 (‘CA 2006’), the Deregulation Act 2015 and the Small Business Enterprise and Employment Act 2015 and as already mentioned, CIGA 2020 has introduced new insolvency procedures.
The most significant reforms to the law of insolvency since the IA 1986 was enacted were contained in the EA 2002 and CIGA 2020. Let us deal with each in turn.
Summary of EA reforms
The EA came into force on 15 September 2003 (the ‘Relevant Date’).
The aims of the corporate insolvency reforms contained in the EA 2002 were:
- to promote the rescue culture;
- to increase entrepreneurship by giving prominence to collective insolvency procedures over enforcement procedures; and
- to remove the stigma attached to personal insolvency (bankruptcy) as a result of running a failed business in order to encourage a more U.S. style approach to entrepreneurship.
The focus of the EA 2002 was on streamlining the administration procedure to encourage company rescue and to restrict the use of administrative receiverships by holders of qualifying floating charges.
Summary of the CIGA 2020
CIGA introduces two new insolvency procedures: the pre-insolvency moratorium and the new restructuring plan for companies. These are intended to make restructurings which avoid an administration or liquidation more likely and hence they promote the rescue culture beyond what the EA 2002 sought to achieve. The effect of the CIGA reforms is to continue the path forged by the EA 2002 of making UK insolvency procedures less creditor friendly and more debtor friendly and thereby achieve a greater balance of power between creditors and debtors.
CIGA has also introduced temporary changes to the IA 1986 to help mitigate the economic impact on businesses caused by the Coronavirus pandemic.
CIGA has also prohibited the enforceability of termination clauses in most types of contracts for the supply of goods and services which allow the counterparty to terminate the contract on the ground that the company has obtained a pre-insolvency moratorium or has entered into administration, liquidation or administrative receivership or its creditors have approved a CVA or the court has sanctioned a restructuring plan or a scheme of arrangement. There is also a prohibition on suppliers making it a condition of any future supply that pre-insolvency debts owed to them must be paid. The effect of these prohibitions is that suppliers must continue making supplies under the terms of the contract notwithstanding the company has entered into one of these procedures provided the company pays for supplies made after the commencement of the relevant procedure. The prohibitions (i) do not apply to loans and other types of financial contracts, (ii) do not prevent termination of a contract or a licence if the company commits a default after it enters into an insolvency procedure or (iii) if the supplier terminates the contract pursuant to a contractual clause that allows the contract to be terminated by the giving of a notice (e.g. a three months’ notice termination provision).