What considerations should practitioners be taking into account when deciding whether or not the provisions on ipso facto clauses introduced by the Corporate Insolvency and Governance Act 2020 apply to agency, introducer, or commission agreements?

What considerations should practitioners be taking into account when deciding whether or not the provisions on ipso facto clauses introduced by the Corporate Insolvency and Governance Act 2020 apply to agency, introducer, or commission agreements?

Produced in partnership with Lynne Counsell of 9 Stone Buildings

 

Corporate Insolvency and Governance Act 2020

The object of the Corporate Insolvency and Governance Act 2020 (CIGA 2020) was to avoid insolvency and assist businesses to continue operating during the coronavirus (COVID-19) pandemic and ensuing economic uncertainty. The UK government published the Corporate Insolvency and Governance Bill on 20 May 2020. It went through the accelerated Parliamentary process and received the Royal Assent on 25 June 2020.

The main parts of CIGA 2020 consist of the following:

• a new moratorium whereby the formal insolvency process is suspended

• a new restructuring plan for companies in financial difficulty whereby a company and its creditors (and/or members) can agree a plan for the purpose of reducing, preventing or mitigating its financial difficulties

• a prohibition on the issue of statutory demands and winding up petitions relating to debts arising from coronavirus

• suspension of the wrongful trading provisions

• protection of the supply of goods and services by preventing termination on the grounds of insolvency

See Practice Note: Corporate Insolvency and Governance Act 2020.

 

Ipso facto clauses

CIGA 2020, s 14 deals with the supply of goods and services and ipso facto clauses. An ipso facto clause is a provision in an agreement which allows one party to terminate upon the bankruptcy or insolvency of the other. CIGA 2020, s 14 inserts a new provision 233B in the Insolvency Act 1986 (IA 1986). IA 1986, s 233B(3) provides that:

‘A provision of a contract for the supply of goods or services to the company ceases to have effect when the company becomes subject to the relevant insolvency procedure if and to the extent that, under the provision—

(a) the contract or the supply would terminate, or any other thing would take place, because the company becomes subject to the relevant insolvency procedure, or

(b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company becomes subject to the relevant insolvency procedure.’

‘Relevant solvency procedure’ is defined in subsection (2) and includes a moratorium under CIGA 2020, Pt A1.

 

Considerations for the practitioner

The following considerations should be taken into account in assessing whether these provisions render the ipso facto clause unenforceable in an agency, introducer, or commission agreement:

• the type of agreement, regardless of the name applied by the parties. Agency agreements can take many forms, including, for example, introduction agency agreements (also called a commission agreement or referral agreement). See: Agency—overview and Practice Note: Nature and types of agency. Agency, introducer, or commission agreements would usually involve the supply of a service and thus constitute a contract for the supply of services, however this has not yet been tested by the courts in the context of IA 1986, s 233B

• the interaction of CIGA 2020 with the Commercial Agents (Council Directive) Regulations 1993 (CA(CD)R 1993), SI 1993/3053 in the case of contracts with commercial agents (as defined in CA(CD)R 1993, SI 1993/3053, reg 2). Commercial agents include marketing agents, sales agents and introducing agents but the Regulations only apply to agency agreements in respect of goods, not services. The Regulations confer certain protections on a commercial agent including an entitlement, under CA(CD)R 1993, SI 1993/3053, reg 17, to indemnity or compensation on the termination of the agency agreement. Under CA(CD)R 1993, SI 1993/3053, reg 18, compensation is not payable if the commercial agent has himself terminated the agency contract unless such termination is justified on certain grounds. See Practice Notes: Commercial agency and Termination of commercial agency. A purported termination by a commercial agent in breach of CIGA 2020 on the grounds of the principal’s insolvency would invalidate any right to compensation or indemnity

• it would normally be evident to a practitioner whether or not a company has become subject to a ‘relevant insolvency procedure’ but, having assessed the nature of the agreement, the relevant clause itself needs to be considered. IA 1986, s 233B(3) does not just refer to termination rights but ‘any other thing’ which is much wider than a right to end the contract

• under CIGA 2020, s 15 there is a temporary exclusion for small suppliers of goods or services ending on 30 September 2020, who would still be entitled to exercise the ipso facto clause. A supplier is a ‘small entity’ if at least two of the following conditions are met in relation to the most recent financial year: (a) the supplier’s turnover was not more than £10.2m (b) the supplier’s balance sheet total was not more than £5.1m (c) the number of the supplier’s employees was not more than 50

• it should be noted that an ‘entity’ for the purposes of this clause, unlike IA 1986, s 233B, does not only mean a company. It also includes a limited liability partnership, any other association or body of persons, whether or not incorporated, and any individual carrying on a trade or business

• the further provisions under IA 1986, s 233B(5) also need to be considered as they specify when an ipso fact clause can still be effective. These relate to termination of the contract. The supplier can still terminate if: (a) the administrator, administrative receiver, liquidator or provisional liquidator consents (b) in any other case the company consents to the termination of the contract or (c) the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract

For further guidance, see Practice Note: Corporate Insolvency and Governance Act 2020—restrictions on ipso facto clauses and Q&A: What should be taken into account when drafting a contract for the supply of goods or services in light of statutory controls on rights in the event the customer is subject to an insolvency procedure including under the new Corporate Insolvency and Governance Act 2020?

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