January, 2021 - Corporate Insolvency and Governance Act 2020 – why it matters in shipping and international trade

New UK legislation has come into force which may have significant implications in the event of the insolvency of one of the parties to a contract. Key provisions include the ability for a company to apply for a moratorium to protect it from creditors and the potential nullification of termination clauses.  The new legislation may be relevant to Members seeking recovery of unpaid debts from contractual counterparties in financial strife.

The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on 26th June, 2020. It was designed in part to offer temporary protection to struggling businesses in the present economically challenging environment arising out of the COVID-19 crisis, but in addition introduces permanent measures which may impact international trade. 

Part A1 moratoriums

Up to 30th March, 2021 a struggling company may apply to court for a moratorium preventing creditors from taking action against it for 20 business days, to give the company some breathing space to consider rescue options.  This can be extended by a further 20 days by notice to the court, without the need for any creditor consent. Thereafter, additional extensions may be obtained by agreement of the creditors or court subject to certain conditions. 

Effect on termination clauses in supply contracts

Contracts for the supply of goods and services to a company often contain clauses providing for the termination of the contract or some other remedy in the event that the buyer becomes subject to an insolvency procedure.  Under the provisions of CIGA, such clauses are potentially rendered ineffective.

Whilst CIGA primarily protects UK registered companies, its protection may also apply to international insolvencies as a result of cross-border insolvency provisions contained in the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) and the Cross-Border Insolvency Regulations 2006 (CBIR). A company which is subject to foreign insolvency proceedings may apply to have those proceedings recognised in England under CBIR. Once that recognition is in place, English legal proceedings, including arbitration, cannot be commenced or continued against that company. In international trade, where contracts frequently contain English law and jurisdiction clauses, this can clearly pose a significant hurdle to an innocent, unpaid party. 

Practical implications

In the event of the insolvency of a UK buyer under a supply contract, termination clauses will no longer be effective. There is also a possible risk that termination clauses in English law supply contracts will be ineffective in the event of a foreign insolvency of a buyer. Despite the CBIR, to date the English courts have upheld contractual rights of termination in cross-border insolvency situations. However, this stance may change in light of the provisions of CIGA dealing with termination clauses.  

Equally, the Part A1 moratorium may apply such that an innocent party may not be able to take any action against a defaulting party while the moratorium remains in place. In practice, this could prejudice, for example, an owner’s right to exercise a lien or withdraw the ship, or otherwise to pursue a charterer for unpaid hire.  

Whether these provisions will indeed be applied to foreign insolvencies remains to be tested. It is recommended that in situations where Members are concerned about the financial viability of their counterparties, they act swiftly to seek advice on the appropriate actions to take and to pay close attention to boiler-plate insolvency provisions when entering into new contracts.