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Insolvency Act: Changes unsettle secured creditors


The Corporate Insolvency and Governance Bill (the Bill) became the Corporate Insolvency and Governance Act 2020 (the Act) in June 2020. The Act is intended to give extra support to companies in financial difficulty and has been broadly welcomed by the legal profession. This article considers specifically how the Act is likely to affect the rights of those in the transport and warehousing industries in relation to liens and the termination of contracts with customers in financial difficulty.


The effect of the Act when exercising a lien What is a lien? A lien conveys a right on a party to retain possession of goods (irrespective of ownership) until payment of carriage, storage and other charges has been made. The most useful lien for a carrier is a contractual general lien, such as clause 8A of the British International Freight Association (BIFA) Terms. This gives the carrier the right to hold onto goods until all sums due on the account have been paid up to date. Often a contract will also set out a right for the carrier to sell the goods in its possession and retain the proceeds if prompt payment is not made.


The moratorium One of the effects of the Act is to avail companies who cannot (or are likely to become unable to) pay their debts of a moratorium, similar to the position that applies in formal administration proceedings. Once the Act is passed into law, companies will be able to file papers at court seeking a moratorium. They will then be protected from creditor action from the time the filing is made for an initial period of 20 days. This period can be extended by a further 20 days and then up to a year with creditor support. During a moratorium, a monitor will be appointed to oversee (though not control) the business of the company.


The effect on liens The relevant provisions of the Bill provide that during a moratorium, no steps may be taken to enforce any security over the company’s property, except with the permission of the court. This is likely to include liens. The language in this section of the Act is very similar to the


language used in the Insolvency Act 1986 in relation to the rights of secured creditors against a company in administration, where a moratorium will also apply. In those circumstances, a secured creditor requires the permission of the administrator or the court to enforce its security. The courts have generally been supportive of creditors


in this situation, taking the view that, “it cannot be right that the appointment of an administrator has the effect of turning a secured creditor into an unsecured creditor” (Re Paramount Airways Ltd. [1990]). Experience shows that administrators will usually give their permission for a creditor to exercise (or continue to exercise) a right of lien or sale during a moratorium, provided the right existed before the moratorium, in the knowledge that the courts would probably take the same approach. However, under the Act, there is


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