Proposals to Restrict IT Suppliers Terminating on Customer Insolvency

July 17, 2013

The Enterprise and Regulatory Reform Act 2013 gives the Government the power to introduce secondary legislation that voids terms in IT supply contracts that permit the IT supplier to terminate or alter their supply if their customer becomes insolvent. These powers seek to extend the protections given to insolvent companies under current insolvency law. The main aim of the reform is to support the rescue of viable insolvent businesses. The Government intends to issue a consultation on these powers in due course and bring them into force in April 2014. This article considers the implications of the reform in practice.

The current framework

Currently, under s 233 of the Insolvency Act 1986, suppliers of ‘essential supplies’ (gas, water, electricity and communications services) may seek a personal guarantee from an insolvency practitioner before continuing to supply an insolvent company, but may not demand payment of pre-insolvency debt as a condition of further supply.

Extending protection to the IT sector

The Government considers that IT supplies are now equally critical to the continuing operation of an ailing business as traditional utility supplies. It has therefore included s 92 in the Act to give it the power to extend the present list of essential supplies to include supplies ‘for the purpose of enabling or facilitating anything to be done by electronic means‘, ie IT supplies.

The Government will consult with interested parties in due course to determine exactly who will be caught by this extension. It specifically chose to use secondary legislation for this purpose and to give it the flexibility to update the scope of this legislation in light of changing market practices.

The Act also grants a power to extend the list of essential supplies to on-sellers of utilities and communications supplies. This reflects the way the utility and telecoms markets have evolved and been deregulated since current insolvency law was first enacted.

Further protections against termination of essential supplies

In addition, s 93 of the Act gives the Government the power to introduce secondary legislation to render void any contractual terms that allow providers of essential supplies to withdraw supply or alter the terms of a supply contract (for example, by increasing charges) on account of certain insolvency circumstances.

This provision covers terms that allow a supplier to terminate the contract on account of a termination event that occurred before the insolvency, but which had not been exercised by the supplier by the time of the insolvency. However, to ensure that the interests of suppliers are protected, a number of express safeguards must be included in any secondary legislation made under this power. The supplier must be given the right to:

·                 terminate the supply contract if the relevant insolvency practitioner or a court grants permission for such termination;

·                 terminate the supply contract if post-insolvency charges are not paid within 28 days of the date that they fall due; and

·                 request a personal guarantee for payment from the insolvency practitioner as a condition of continuing the supply (though there may be exceptions to this right).

Power is also given to include more safeguards as necessary.

Tricky questions for the IT sector

The intention is to support the rescue of insolvent companies by preventing providers of IT and utility supplies from withdrawing or altering the contractual terms of supply following an insolvency. If rescue is not possible, the reform should still deliver better outcomes for creditors as a whole in the insolvency. In particular, the changes protect against suppliers of essential supplies seeking ‘ransom’ payments (ie requiring fees up-front or increasing fees) as a condition of continuing to supply in insolvency situations. The reform has been introduced following lobbying from the Association of Business Recovery Professionals.

The powers are expected to be brought into force by 6 April 2014. However, there are still a number of difficult questions to be answered.

For example, most ‘essential supplies’, such as gas and water, are inevitably provided from within the UK. This is not the case with IT supplies, which are frequently provided by overseas suppliers under contracts that are subject to foreign laws and foreign jurisdiction. Moreover, with remotely provided services, such as cloud services, the supplier might not have any physical presence in the UK. Attempting to enforce these new provisions out of jurisdiction could be challenging.

Also, the powers only prevent the IT supplier from terminating or varying their contract. They do not appear to affect any non-alienation provisions in those contracts. IT suppliers will still presumably have a veto over any attempt to assign their contract to a third party, for example as part of pre-pack sale.

It will be interesting to see how these issues are addressed once the consultation process begins. Further details about these changes are available here <>.

Sanjana Sagoo is an associate in the Technology, Media and Telecommunications practice at Linklaters.