Insolvency Protection for IT Supplies

September 30, 2015

Amendments to the Insolvency Act 1986 will extend the protection of essential supplies on insolvency to most private utility suppliers. They will also extend protection to I.T. supplies, including data storage and processing and website hosting. Further protection is introduced where contracts are entered into from 1 October 2015, so that insolvency related terms which allow higher supply charges in the event of administration or company voluntary arrangement will be prohibited.

Why is the law changing?

Since the opening up of the utilities market three decades ago, the nature of utility supplies has changed. Private suppliers have come into the market and were often not caught by s 233 of the Insolvency Act 1986, which protects companies against suppliers of essential utilities terminating those supplies on insolvency. The way in which companies operate has also changed. IT supplies are hugely important for the continuation of many businesses in a way that simply was not the case when the original legislation came into force. As a result, s 233 has been amended and a new s 233A has been introduced, both with effect from 1 October 2015. Similar changes are also being made in the case of personal insolvency.

What will the new law do?

The revised s 233 extends the list of essential supplies to include private suppliers of utilities (being gas, electricity, water, and telecoms). It also extends the list of essential suppliers to include IT supplies, specifically ‘for the purpose of enabling or facilitating anything to be done by electronic means’. This means that these suppliers will be unable to terminate supplies or demand existing pre-insolvency debts are paid as a condition of continuing supplies.

There are some safeguards for suppliers. First, supplies can be terminated with the office holder’s consent (whether the administrator, CVA supervisor, liquidator or administrative receiver). Secondly, the supplier can request a personal guarantee from the office holder that they will pay post-insolvency charges as a condition of continuing supplies. If the office holder does not provide the guarantee within 14 days, the supplier may terminate. Thirdly, if post-administration costs are not paid within 28 days of falling due, the supplier can also terminate. As a final resort, the supplier has the fourth option of applying to court on the ground that continuing to supply is causing them ‘hardship’.

The new s 233A also provides that, where a contract is entered into on or after 1 October 2015, any provision that seeks to allow the supplier to increase the cost of supplies after the company goes into administration or a voluntary arrangement will be prohibited. This means companies will be able to benefit from the pre-insolvency rate.

What should suppliers do?

As the changes take effect on 1 October, suppliers wishing to mitigate the effect of the new provisions should act quickly. Where customer contracts are part of an existing framework agreement, suppliers may want to ensure the contract will be treated as pre-dating the 1 October in order to avoid the restrictions on pricing under s 233A. Contracts should also be checked to see whether the option to vary terms bites on administration (or CVA) or at an earlier stage, which would not be caught by the new legislation. 

When taking on new accounts, suppliers should also undertake financial checks to ensure they are not providing supplies at an unduly discounted rate that they will be held to in the event that the company goes into administration or a voluntary arrangement.

What should insolvency practitioners do?

In some cases the new s 233A will be relevant to contingency planning. Where the nature of the business relied heavily on essential utilities or IT supplies that are currently being received at a favourable rate, administration may be preferable to liquidation in order to take advantage of fixed supply rates. Insolvency practitioners (Ips) should also expect requests for personal guarantees from an extended category of suppliers.

On the whole, the reforms are good news for IPs and the rescue culture. IPs are less likely to find themselves held to ransom by creditors supplying essential supplies and will often find they benefit from a 28-day guaranteed supply period, in which suppliers are obligated to continue supplying the company for 28 days after a post-insolvency payment becomes due. There will be cases where suppliers attempt to avoid this by applying to court for relief, but they would need to show hardship and this would need to be balanced against the interests of other creditors. Where the purpose of administration could be achieved but for the supplier cutting supplies within the first 28 days, it is questionable whether the courts will intervene.

Rita Lowe is a Partner at CMS Cameron McKenna LLP, where she is head of the Banking and Finance team.

Helen Coverdale is a Professional Support Lawyer at CMS Cameron McKenna LLP.