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An overview of 2020 in litigation – effects of COVID-19 and other changes

With 2021 just around the corner, our Dispute Resolution team discuss some of the changes that have taken place during 2020, which affect litigation. The outbreak of COVID-19 and the ‘lockdown’ measures implemented by the Government to prevent the spread of the virus have had a substantial impact on the administration of justice. There have also been some changes that have been planned for a while.

Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (‘CIGA’) brought significant changes to UK insolvency law with the introduction of three permanent measures:

  • a new moratorium procedure for companies requiring protection from creditors to give them breathing space to explore financial rescue options;
  • a new restructuring plan which allows a company to enter into arrangements with its creditors or members to restructure its liabilities and thus avoid liquidation; and
  • restrictions on the termination of contracts for the supply of goods and services (for further details, see below).

The CIGA also introduced some temporary measures to assist with situations that have arisen as a result of the COVID-19 pandemic, which include:

  • restrictions on presenting winding-up petitions based on statutory demands and making winding-up orders till 31 March 2021;
  • temporary changes to wrongful trading rules, which were initially put in place until 30 September 2020 but were reintroduced on 25 November to remain in place until 31 March 2021; and
  • flexibility in respect of company meetings and filings with Companies House.

The impact of the CIGA on supply contracts

The majority of contracts for the supply of goods and services contain ‘ipso facto’ clauses. These clauses allow the supplier to terminate the supply contract if the customer enters formal insolvency proceedings. However, the CIGA now prevents a supplier from terminating by exercising an ipso facto clause.

Unless the supply contract falls into the category of exempt suppliers under the CIGA, a supplier will be required to continue providing goods and services even if the customer is subject to a ‘relevant insolvency procedure’. This applies even where there is provision in the supply contract that provides for automatic termination or allows the supplier to terminate following the customer’s insolvency. Nor can the supplier insist on supply continuing subject to the pre-insolvency arrears being paid. Whilst a supplier will still be required to fulfil its obligations under the terms of the supply contract, payment of the debts accumulated will generally be given higher in priority during the insolvency process. This is due to the fact that the debt(s) will be considered an expense of the insolvency. As a result, they will take priority over the majority of other debts considered by the insolvency office holder.

Business interruption insurance policy cover – the FCA Test case

As a result of COVID-19, many policyholders whose businesses were adversely affected suffered substantial losses. This has led to a large number of insurance claims under business interruption policies. Whilst some insurers accepted liability, others had disputed it leading to concern about the lack of clarity and certainty surrounding the wording of policies and their coverage. In light of this, the Financial Conduct Authority (“FCA”) issued proceedings to seek declarations as to the correct interpretation of business interruption policy wordings.

21 commonly used policies were considered as part of the claim. It was estimated by the FCA that the sample wording from those policies was similar to 700 different policies used by 60 different insurers. As a result, the decision in the proceedings would be likely to impact an estimated 370,000 policyholders.

On 15 September 2020, judgment was handed down, which favoured the FCA’s broader interpretation of the sample wording. The test case removed the need for policyholders to resolve a number of the key issues individually with their insurers. Given the likely impact of the judgment, permission to appeal was granted to the FCA and six of the eight defendant insurers by way of a Leapfrog appeal to the Supreme Court. The appeal commenced on 16 November 2020, and the decision is eagerly awaited and expected in the New Year.

Possession Proceedings and Enforcement

In response to the COVID-19 outbreak, the Government sought to relieve the pressure on tenants who were struggling to pay rent as a result of the pandemic. This included extending the statutory notice period for landlords under the Coronavirus Act 2020. From 29 August 2020, (with the exception of the most serious cases) landlords are not able to start possession proceedings unless they have given their tenants 6 months’ notice.

In addition, on 26 March 2020, Practice Direction 51Z entered into force, which effectively stayed all possession matters brought under Civil Procedure Rule 55 until 30 October 2020. Whilst landlords are now able to commence proceedings and to progress previously stayed matters; the Government has changed the law to ensure bailiffs do not enforce evictions until at least 21 February 2021.

The return of Crown Preference

Prior to the Enterprise Act 2002, HMRC had preferential status as a creditor in insolvencies. When it came to unpaid taxes, HMRC would rank ahead of floating charge holders and (ordinary) unsecured creditors. This was known as ‘Crown Preference’, which was removed by the Enterprise Act 2002.

As a result of the Finance Act 2020, Crown Preference has been restored in respect of insolvencies commencing on or after 1 December 2020. The changes mean HMRC will now rank in priority to a floating charge holder, unsecured creditors, and pension funds in respect of the payment of certain taxes.

To find out more about any of these issues, please contact our Dispute Resolution team.