The focus on offsite construction has sharpened throughout the COVID-19 pandemic, with many wondering whether the outbreak and the consequential delays to existing construction projects would propel offsite forward as the future of construction.
But there has not been as much focus on a more immediate change and challenge for modern methods of construction (MMC) brought about by the new Corporate Insolvency and Governance Act 2020 (CIGA) which came into force in late June 2020. Intended to protect the UK manufacturing industry in a tough economic environment, it has caught some in the construction sector unawares and left others wondering how it fits with the Construction Act.
CIGA in Brief CIGA brings about the biggest change to insolvency legislation in 20 years. From a construction industry point of view, the main things to be aware of are that: it has introduced two new restructuring ‘tools, and it disapplies a supplier's right to terminate under its contract terms if the company it is supplying to enters into insolvency proceedings (with limited exceptions). Significantly, it applies retrospectively to contracts already in place. The two new restructuring ‘tools’ introduced by CIGA are: a new moratorium on enforcement action, and a new ‘restructuring plan’ process.
The moratorium is a new standalone insolvency procedure which enables a company in financial difficulty to obtain some ‘breathing space’ (i.e. protection from creditor action) to restructure its liabilities - similar to the US's Chapter 11. The new restructuring plan process is a flexible restructuring compromise allowing companies in financial difficulty (or their creditors, shareholders or members) to apply to the court to restructure their debt. Although these new options may assist financially struggling contractors and MMC suppliers in rescuing their businesses, it is the loss of the right to terminate a supply contract for customer insolvency which is of more interest.
The Right to Terminate an MMC Supply Contract Broadly speaking, the CIGA restrictions on terminating a contract apply when a supplier is providing goods or services to a company, and that company enters into insolvency proceedings (with limited exceptions). In this case, assuming CIGA applies, the supplier cannot:
• Terminate the contract due to the company entering into insolvency proceedings (whether termination arises automatically, or whether the supplier has to exercise a right to terminate, under the contract's terms)
• Terminate the contract because of a contractual right that arose before the company’s insolvency (unless the supplier terminates before the company enters into insolvency proceedings)
• Say that it will only continue to supply the goods and services if the company pays all or any outstanding amounts for supplies made before the company's insolvency proceedings.
