Corporate Insolvency and Governance Act 2020: freezes on contract terminations

Corporate Insolvency and Governance Act 2020: freezes on contract terminations

This news analysis provides an in-depth consideration of the changes to termination clauses introduced by the Corporate Insolvency and Governance Act 2020. It is based on a webinar given for PRIME Finance on 27 July 2020. Written by Philip Wood CBE, QC (Hon)*.

Introduction

The UK nullification of what are called ipso facto clauses (these are clauses in a contract which provide that a counterparty can terminate the contract on the commencement of insolvency proceedings against the other party) has been one of the permanent changes introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020). For further analysis of the changes introduced by CIGA 2020, see News Analysis: Corporate Insolvency and Governance Act 2020—the rise of the moratorium and restructuring plan and the fall of the Scheme? The freezes on these terminations represent quite a major change to UK insolvency law.

Ipso facto clauses as events of default are typical of most formal contracts except the most ephemeral or short-term. In addition, English case law has held that the insolvency of a counter-party will be treated as a repudiation if the insolvency puts it out of the power of the insolvent party to perform the contract.

Statutes nullifying these clauses are widespread internationally. The statute follows the usual pattern of a provision for the nullity of insolvency events of default, followed by carve-outs for financial markets and other exclusions. These exclusions are wide in the UK case.

The freeze is one of the most intrusive of the stays on creditors which come into force on an insolvency and is controversial.

The first major freezes appeared in the US Bankruptcy Code of 1978 and in the French redressement judiciare of 1985. The UK introduced them in 1986 but only for essential utilities, to keep the lights on.

The issue has extra significance because of the role that English law plays as effectively an international public utility as a chosen governing law of major contracts and because the direction of a jurisdiction’s insolvency law is an important indicator

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.