UK ban on terminating contracts for insolvency - lending

The Corporate Governance and Insolvency Bill 2019-2020 (the Bill) had its first reading in the House of Commons on 20 May.  It will make far-reaching changes to English insolvency law.

The immediate reason for the introduction of the Bill lies in the UK Government's desire to minimise the economic consequences of COVID-19, however, many of the changes will have a longer-lasting impact.

This article focuses on the provisions of the Bill which relate to ipso facto clauses and considers how they will affect lenders.

To view our Insights article on how those same provisions will affect commodities trading, please click here.

Ipso facto clauses

The Bill will make ipso facto clauses in certain contracts unenforceable.

The expression has been used to describe a provision in a contract which enables one party to terminate it on the other party entering insolvency proceedings.

Such clauses represent an important right for a supplier of goods and services, but they have an impact on the documents which evidence the provision of financial accommodation.

Virtually all facility agreements contain an ipso facto clause in the form of an event of default which is triggered by the borrower entering insolvency proceedings.

Earlier proposals

The introduction of such a provision into English insolvency law has been contemplated for several years.

In 2016, The Insolvency Service launched a consultation on the reform of corporate insolvency. One of the reforms proposed was the introduction of a moratorium for distressed businesses to enable them to obtain protection against legal action while considering options for rescue.

The proposals took further shape in 2018 when the Department for Business, Energy & Industrial Strategy (BEIS) published its response to The Insolvency Service's consultation and announced its intention to introduce legislation to prevent the enforcement of ipso facto clauses.

Exemptions

BEIS acknowledged that if ipso facto clauses were rendered unenforceable, some finance providers might withdraw their products and services at the first sign of financial difficultly and this would put borrowers in a worse financial position than if the ban had not become law.

BEIS acknowledged that certain types of financial products and services therefore deserved to be exempted from the new provision.

Key question

The key question for lenders is whether the wide exemption announced by BEIS in 2018 has been drafted into the Bill. The Bill excludes both persons and contracts from the ban on ipso facto clauses.

Excluded persons

The ban does not apply to a contract for the supply of goods or services to a company if either the supplier or the company is an excluded person.

Such a person includes an insurer, a bank, an electronic money institution, an investment bank or investment firm,  a payment institution, an operator of a payment system or infrastructure provider, an infrastructure company, a recognised investment exchange, a securitisation company or a company which does anything outside the UK of a similar nature.

Excluded contracts

The ban does not apply to a financial contract.  A financial contract is defined by reference to a list of other types of contract.

These include a contract for the provision of financial services consisting of:

• lending (including the factoring and financing of commercial transactions);
• financial leasing; or
• providing guarantees or commitments.

Examples of other excluded contracts include a securities contract, a commodities contract, a futures or forwards contract and a swap agreement.  Each of these is ascertained by references to other statutory provisions.

Conclusion

The devil is in the detail, but the UK Government appears to have been mindful of the needs of the UK's financial services industry and to recognise that lending and the provision of financial services will play an important role in the economic recovery from the consequences of COVID-19 and beyond.

The definitions used in the Bill are lengthy and complex and their operation is something which will require careful consideration.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.