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Corporate Insolvency and Governance Bill: The impact on commodities

As reported last month, as part of its response to the Covid-19 pandemic, the UK Government has brought forward reforms to the corporate insolvency regime. The Corporate Insolvency and Governance Bill (the "Bill") has now been introduced to Parliament. 

The first reading was held on 20 May and unusually, although not unexpected for emergency bills where there is a broad cross-party consensus, MPs will consider all remaining stages of the Bill on 3 June 2020. It will then move to the House of Lords on 9 June 2020, where a similarly accelerated schedule is expected. The significant measures proposed in the Bill aim to mitigate the expected wave of COVID-19 related insolvencies and "lay the foundations for economic recovery in the UK".

What does the Bill introduce?

The Bill includes both temporary and permanent measures. The temporary measures, introduced to address the immediate financial position of UK businesses, include the suspension of directors' liability for wrongful trading from 1 March 2020 and a prohibition on creditors filing statutory demands and winding up petitions in circumstances where the debtor's indebtedness has been caused by issues related to Covid-19. Corporate administrative requirements, such as filing deadlines and requirements to hold AGMs, will also be temporarily extended if the Bill passes, as expected.

The Bill has also brought forward permanent measures that have been in development since 2018, consisting of a new standalone moratorium regime and a new procedure for companies in financial difficulty to agree on restructuring with their creditors.

The Bill includes an expansion of the restriction on the use of termination clauses by suppliers for companies entering a rescue, restructuring or insolvency procedure. Currently, the Insolvency Act 1986 offers a limited range of protections with respect only to supply of essential services, including water, electricity and gas and broadband/telephony services. If the new Bill is passed into law as currently drafted, this restriction will apply to all contracts of supply, subject to certain exclusions. In addition, suppliers would be prohibited from making the payment of pre-insolvency debts a condition of supply to a company that has entered into an insolvency procedure.

The new provision may cause difficulties for suppliers, who would be required to continue supply to a party that is not fulfilling its payment obligations. They may, however, be reassured by some exceptions to the provision. For example, a supplier can exercise a contractual termination right on the grounds of counterparty insolvency where the court is satisfied that the continuation of the contract would cause the supplier hardship. This threshold is lower than under the previous proposals. In addition, small suppliers will benefit from a temporary exclusion to the provision until one month after the Bill comes into force.

However, significantly for commodity and financial market participants, the Bill identifies a number of exclusions where the new termination restrictions will not apply. These exclusions include the category of "financial contracts", a definition which captures, amongst others, contracts for the sale, purchase or loan of commodities (including emission allowances and renewable obligation certificates (ROCs)) and swap agreements. Moreover, such financial contracts will be excluded whether entered into on a standalone basis or under a master agreement structure. Derivative agreements, spot contracts and securities financing transactions (which include commodities financing structures such as "repos") are also excluded. The Bill further confirms that the provision will not affect set off or netting arrangements.

What does this mean?

A comprehensive briefing on the likely impact of the Bill is being prepared and will be published shortly. For businesses in the commodities sector, there will be some relief that, in most circumstances, they will remain able to exercise termination clauses on the grounds of counterparty insolvency.

Moreover, the confirmation that set off and netting arrangements will be unaffected if the Bill is passed will also be welcome, as these form a core pillar of the master agreement structure on which much trading is based. A restriction on the use of close-out netting for derivative contracts between counterparties would have caused significant upheaval, potentially increasing both counterparty risk and administrative costs.

For more information please contact;

Adam Topping
Partner, London
T +44 (0)20 7264 8087
M +44 (0)7768 553882
E adam.topping@hfw.com

Damian Honey
Partner, London
T +44 (0)20 7264 8354
M +44 (0)7976 916412
E damian.honey@hfw.com

David Chalcraft
Senior Associate, London
T +44 (0)20 7264 8228
M +44 (0)7810 524851
E david.chalcraft@hfw.com

Amanda Rathbone
Professional Support Lawyer (Commodities)
T +44 (0)20 7264 8397
M +4407900167256
E amanda.rathbone@hfw.com

Research undertaken by trainee James Stewart.

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