Insolvency and the continuation of essential supplies

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The Insolvency (Protection of Essential Supplies) Order 2015 (the Order) will mean that contractual terms that allow suppliers of essential supplies to withdraw their services or demand additional (“ransom”) payments in return for their continued provision, or otherwise vary the terms of the contract, will be unenforceable. Most supply contracts will include a provision entitling the supplier to terminate in the event of the customer entering administration or a voluntary arrangement is approved. If the service supplied falls within the scope of the Order, such a provision will be ineffective.

There are some safeguards for suppliers. They will be able to ask the appointed insolvency practitioner to guarantee payment of charges incurred after the start of the customer’s administration or voluntary arrangement as a condition of continuing supply. Suppliers will be able to terminate the contract if post-insolvency supplies are not paid within 28 days of the due date for payment and they will be able to apply to court to terminate the agreement in cases of hardship.

Arguably the most striking aspect of the legislation is the inclusion of IT suppliers within the scope of the essential suppliers and the range of suppliers likely to be affected (including server providers, cloud storage, payment systems, website hosting and data storage). This is hard to argue with: in the modern world most businesses would not survive for long without their IT systems and if the supplier of essential IT services withdraws supplies or imposes new onerous terms, it may render a business rescue impossible.

The Order will also apply to some “on-sellers”, such as landlords who charge tenants for the supply of electricity or other services. It will not cover the suppliers of card payment services, however.

These provisions will only apply to contracts entered into on or after 1 October 2015.