As part of its toolkit to improve rescue opportunities for financially-distressed companies, the Government has announced that:
"Companies will be supported through a rescue process by the introduction of new rules to prevent suppliers terminating contracts solely by virtue of a company entering an insolvency process."
The right to terminate contracts on this basis is already restricted for supplies of essential utilities and IT services. However, this only affects quite a narrow range of suppliers.
In my May 2018 article ‘Insolvency calls time on pursuing claims’, I looked at how various moratoria apply to stop claims when a party enters into certain insolvency processes. I offered a taster when I said that adjudicator’s awards were a strange species because they are not final and binding, that this complicates their enforcement, and that I would look at the complex interaction between insolvency and the enforcement of adjudicator's awards soon.
Garcia v Marex Financial Ltd [2018] EWCA Civ 1468
The Court of Appeal has for the first time applied the rule against reflective loss to claims by creditors. The rule had in the past only been used to prevent claims by shareholders against directors, where the losses claimed by the shareholders reflected those suffered by the company.
Restructuring & Insolvency analysis: Iain Pester, barrister at Wilberforce Chambers, advises that the judgment in the case is a timely reminder that not everything of economic value will necessarily vest in a trustee in bankruptcy pursuant to section 306 of the Insolvency Act 1986 (IA 1986).
How do you spot a zombie company?
Zombie companies walk amongst us. They shuffle along, failing to realise that they are undead, relying on the inaction of creditors and low interest rates to mask their fundamental lack of profitability, poor growth prospects and inability to service their debts. Denied a swift, clean demise, they endure a twilight existence that deprives their living competitors of capital and opportunities.
In a decision of interest to construction industry participants, the English Technology and Construction Court confirmed that, in some circumstances, the directors of an insolvent company may be liable in tort for the failings of that company.
It is not uncommon that, after performing works, a contractor finds out that the employer is insolvent. This may have serious consequences as the contractor will be most likely ranked behind other categories of the employer's creditors in any insolvency process. In this situation, what are the contractor’s other options?
The Consultation
In March 2018, the Government published a consultation on its proposed reforms to the UK’s insolvency and corporate governance landscape. It sought views on ways to reduce the risk of company failures occurring through poor governance, whilst improving the insolvency framework to create a stronger business environment. The Government has now published its response to the consultation and we consider the key changes below.
Parent Company Director Accountability
The long awaited new Scottish Insolvency Rules for Company Voluntary Arrangements and Administration (The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018) were laid in Parliament today. The Rules are a negative SI which means they do not need active approval by Parliament and will automatically come into effect as law unless either the Commons or Lords annuls them within a fixed period after they have been laid. The intention is that they will commence on 6 April 2019.
The Government has announced that it will legislate to prohibit the enforcement of certain contractual termination clauses ('ipso facto clauses').
As with other aspects of the response to recent insolvency and corporate governance consultations, this has given us pause for thought.