Connect with us

Hi, what are you looking for?

Investing

Construction suppliers beware: New corporate insolvency law requires ongoing performance

Builders

The introduction of the Corporate Insolvency and Governance Act 2020 (“CIGA“) in June 2020 was one of the many preventative measures taken by the UK Government in an attempt to safeguard the economy in the wake of the global Covid-19 pandemic.

Its primary purpose is to provide breathing space to businesses during the pandemic as well as to support continued trading.

CIGA, which introduced significant changes to contracts for the supply of goods and services, has significant implications for businesses that supply construction and engineering services.

In this column I outline what those implications are, and what construction businesses can do to protect themselves.

What are the changes to contract law introduced by CIGA, and how does it affect construction businesses?

CIGA introduces a new section 233B into the Insolvency Act 1986. This makes two important changes to contracts for the supply of goods and services.

Firstly, suppliers of goods and services are prevented from exercising certain rights of termination against a company that is going through a relevant insolvency procedure. Secondly, suppliers must continue to supply goods and services even if they have not been paid for goods and services already delivered.

In the context of a construction contract, a supplier is likely to the contractor, a sub-contractor, or a consultant under a professional appointment.

In practice, this means that there is no longer an automatic right for a supplier to terminate a contract in the event of a client becoming insolvent. Rather, there is now a legal expectation that suppliers will continue to deliver.

This means that the supplier will need to continue providing goods and services even if it has not been paid for those already provided at the point the company enters into a relevant insolvency procedure. However, in the context of construction and engineering contracts, if the company defaults on payment during the insolvency period, there is protection afforded to the supplier through its statutory right to suspend works (for non-payment) under section 112 of the Construction Act.

How can suppliers protect themselves?

Potentially, CIGA is a piece of legislation that could wreak significant harm on the construction industry supply chain.

On one level, as a piece of emergency legislation, it made sense at a time when robust, reliable supply chains are essential to, for example, the provision of vital supplies to the NHS.

However, whilst it aims to assist ongoing trading (through securing supply chains) during the Covid-19 pandemic, it is difficult to ignore the possible consequences this may have on cash flow and the strain that this may place on suppliers in the construction sector.

For many years now, this sector has had the benefit of the Construction Act.  One of the main objectives of the Act was to improve cash flow (once famously described by Lord Denning as ‘the life blood of the industry’) through the construction supply chain with the aim of reducing the number of insolvencies in the sector.

The Construction Act sought to achieve this by introducing processes such as adjudication, rights to interim payments and the right to suspend works.

It appears that the practical effect of the changes introduced by CIGA are now in direct conflict with the processes provided by the Construction Act, continuing a growing trend of conflict between insolvency and construction legislation. The effect this will have on the construction and engineering sector as a whole remains to be seen but it is clear that suppliers will need to be even more on their guard than ever.

In this context, there are several practical issues that parties to construction and engineering contracts will need to consider carefully.

  • Is the definition of Insolvency (whether as set out in the standard contracts or in a bespoke form) suitable – or even correct – in light of CIGA?
  • The timing of exercising a right to terminate is even more important than ever. A party must not attempt to exercise a right to terminate before that right has crystallised under the relevant contract. The consequences of doing so incorrectly could be hugely damaging and professional advice should always be sought.
  • Suppliers may seek to negotiate shorter payment periods.
  • Might this more precarious landscape prompt wider use of mechanisms such as project bank accounts to provide greater levels of comfort for the supply chain?

I would urge construction businesses concerned about the impact of CIGA on their cash flow and financial sustainability to seek immediate legal advice.

Refusing to perform could expose firms to potential claims from liquidators – so it’s certainly worth seeking specialist legal advice to ensure you minimise your risk and exposure to future claims.

Read more:
Construction suppliers beware: New corporate insolvency law requires ongoing performance

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the daily email that makes reading the news actually enjoyable. Stay informed and entertained, for free.
Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

Latest

Economy

People walk inside the Marikina Public Market, July 28. — PHILIPPINE STAR/ MICHAEL VARCAS By Kyle Aristophere T. Atienza and Jenina P. Ibañez, Reporters...

Economy

By Kyle Aristophere T. Atienza and Beatrice M. Laforga, Reporters THE LAST TWO packages under the comprehensive tax reform program, as well as a...

Economy

THE BUREAU of the Treasury (BTr) has set a P200-billion borrowing program for August as it expects sustained demand for government securities. The BTr’s...

Economy

By Beatrice M. Laforga, Reporter THE Bureau of Internal Revenue (BIR) suspended a regulation that would have increased the corporate income tax for nonprofit...

Economy

THE World Bank (WB) and the Philippine government recently signed an agreement for the $280-million (P14-billion) additional financing for a rural development program that...

Economy

CEBU Landmasters, Inc. (CLI) is venturing into resort development as the listed Visayas-Mindanao property company disclosed on Wednesday a P2.5-billion project that will beef...

You May Also Like

Investing

Having a good Instagram marketing agency to back up your Instagram account is an absolute must going into the new year. With competition stronger...

Investing

As a traditionally rigid insurance industry becomes bogged down by antiquated processes and operations, a handful of industry leaders are seeking to shake things...

Economy

US President Joseph R. Biden, Jr., will rely on ally countries to supply the bulk of the metals needed to build electric vehicles and focus on...

Economy

THE Securities and Exchange Commission (SEC) has warned the public from investing or to stop any investment in a group named Maxxprofit Computer Trading...

Disclaimer: SmartRetirementReport.com, its managers, its employees, and assigns (collectively "The Company") do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

Copyright © 2021 SmartRetirementReport. All Rights Reserved.

Get the daily email that makes reading the news actually enjoyable. Stay informed and entertained, for free.



Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!