Proposed Insolvency Act changes for IT and telecoms providers

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The Government launched a consultation on 9 July seeking views on implementing enhanced powers to ensure the continuity of the supply of essential services – notably gas, electricity, water, communication services and IT goods and services – to insolvent businesses and individuals. The idea is that suppliers of these goods and services will be unable to withdraw their services by reason of their customer’s insolvency or seek to impose preferential terms as a condition of continued supply.

Perhaps the striking aspect of the announcement 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). Logically this is hard to argue with. In the modern world there are very few businesses that could 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 proposals will also cover “on-sellers”, which is where the supply is made through an intermediary. The consultation gives as examples of on-sellers the common scenario in the retail sector where a number of different IT and telecoms services may be used to run store and till equipment and to accept credit card payments. Another example given is those landlords who charge tenants for the supply of electricity or other services.

Section 233 of the Insolvency Act 1986 (the Act) currently provides that suppliers of gas, electricity, water and communications services may make it a condition of continued supply to a company in an insolvency procedure that the office holder personally guarantees payment of the charges in respect of the supply. Similar provisions apply in respect of individuals (section 372 of the Act). The supplier may not, however, make it a condition of the continued supply that outstanding indebtedness is discharged. These provisions do not currently apply to the suppliers of IT services or on-sellers.

The Government considers the existing legislation to be outdated. First, the scope of the service providers affected is considered to be too narrow. Further, it does not preclude suppliers from exercising termination rights on the customer’s insolvency or demanding “ransom payments”/ varying the terms of supply as a condition of continued supply. In addition to putting these suppliers at an unfair advantage over other creditors, seeking ransom payments or varying terms of supply in this way may hamper the business’s chance of survival, undermining the rescue culture.

It should be noted that most contracts for the supply of services will entitle the supplier to terminate on the customer’s insolvency. If the Government’s proposals become law, then this type of provision will be ineffective. The proposals would also prohibit contract terms enabling the supplier to increase its charges upon the customer entering an insolvency process.

The proposals do include some safeguards for suppliers. The enhanced powers are restricted to what the proposals refer to as “the main business rescue procedures”, being administration, voluntary arrangements and individual voluntary arrangements where the individual has been carrying on a business. Suppliers will continue to be able to request a personal guarantee from the office holder and will be entitled to terminate post-insolvency supplies which remain unpaid for more than 28 days (or with the permission of the court or insolvency practitioner). The consultation also makes the point that supplies made to an insolvent business will, in the case of an administration, rank as an expense of the administration and will therefore have priority over other creditors.

The proposals do call to mind the US Chapter 11 procedure under which safeguards are in place to ensure continuity of certain supplies, and there is a clear focus on protecting the insolvent company’s business while it seeks to implement a reorganisation. At present, the proposals only extend protection to supplies of IT services and on-sellers. If they are successfully implemented, could they be extended to suppliers of other “essential” goods and services? Will other US rules relating to the assumption and rejection of contracts be imported into the Act? If so, perhaps the proposals should be viewed as the first stage of a cultural shift in the UK towards an insolvency regime that puts the survival of the business over certain third party rights and is more closely aligned to the procedure in the US.

The consultation closes on 8 October 2014. Suppliers who may be impacted by the Government’s proposals and other interested parties have until then to raise their concerns. The Government will then consider the responses and decide whether, and how, to proceed.

If you would like to discuss how the proposals may impact your business or how to respond to the consultation, please contact us.