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IT Outsourcers Beware: The impact of the Enterprise and Regulatory Reform Act 2013

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Synopsis

The Enterprise and Regulatory Reform Act 2013 (“ERRA”) has received Royal Assent and covers a number of practice areas in particular corporate, competition, employment and commercial. Under the ERRA the Government has the power to introduce secondary legislation to increase the existing protection over ‘essential’ supplies to insolvent companies and individuals.

The changes implemented under the ERRA amend the Insolvency Act 1986 (“IA”).  The IA currently makes provision in Section 233 for administrators/liquidators/supervisors in various insolvency-like scenarios to require the continuing supply of gas/electric/water/phone services provided that future payment for these services is guaranteed but without having to be forced to guarantee that outstanding charges are paid. 

Section 92 of the ERRA amends Section 233 of the IA to increase the scope of the essential supplies beyond gas/electric/water/phone to goods or services supplied for the purpose of enabling or facilitating anything to be ‘done by electronic means’ (ERRA Section 92(2)(b)).  While the full list of essential supplies will become known following a Government consultation (scheduled to report later this year) the inclusion of “done by electronic means” is understood to mean that certain IT services will be included. 

The IT services covered will, subject to certain conditions explained below, need to be provided to a company which enters administration or a voluntary arrangement. The Department for Business, Innovation & Skills (“BIS”) has announced that they will publish the detailed implementation timetable shortly.

Effect on IT suppliers

Under the ERRA suppliers in the IT sector will be required to provide essential supplies to a customer if it enters into administration or a company voluntary arrangement  but not liquidation (as liquidation is a terminal process) .  The supplier and customer cannot contract out of this obligation even if the customer receives a benefit such as a lower charge as a result.  Once an event of insolvency occurs the supplier must, subject to the exceptions set out below, obtain the consent of either the applicable insolvency practitioner or the Court to terminate their supply or change the terms of supply.

The Government will consult with affected parties as to the impact of the proposals prior to implementing the new powers. The secondary legislation to be enacted following the consultation is likely to void any contractual term that would:

(a)     automatically terminate the supply agreement;

(b)     grant the supplier a right to terminate the supply agreement; and

(c)     result in or enable the supplier to make changes to the supply terms (including increasing charges),

in the event of the customer entering into administration or a voluntary arrangement.

The rationale for the amendments introduced under ERRA in relation to IT services is that  certain IT services should now be regarded as essential operational business services and warrant the same degree of protection in insolvency as traditional utilities. The Government is keen to avoid customers being held to ransom by suppliers of core IT services which cannot quickly be sourced from alternative suppliers. As it is vital that a business seeking to come out of insolvency has access to essential suppliers, the suppliers of such services have a significant advantage over other creditors in negotiating new terms and demanding payment of outstanding charges. This combined with the tougher economic climate over the past few years, which has seen a steady increase in the number of occasions under which companies would benefit from the new legislation, has seen increased support for legislative change.

The ERRA amendments also come against the backdrop of recent government legislation to restrict the ability of technology and IT suppliers to terminate contracts or change the terms of supply on account of an insolvency process to ensure continuity of supply.  In 2011 the Investment Bank Special Administration Regulations (SI 2011/245) came into force and prevent suppliers from terminating the supply of certain essential services (e.g. hardware and software used for trading, financial data, communications infrastructure and data processing) to investment banks in Special Administration unless various conditions are satisfied.  .

The Government has indicated that it is planning to add to the list of suppliers who as a result of being obliged to provide essential services can seek personal guarantees from the applicable insolvency practitioner prior to continuing the supply of essential services.  At present the list of these suppliers only covers utilities such as electricity, gas, telecommunications and water. It is widely expected that following the consultation the Government will add IT suppliers to the list.

Nothing in the ERRA will have any effect on the supplier’s position in relation to pre-insolvency debts. Therefore they would remain a creditor and would be subject to the Insolvency Rules, which set out the procedures and priorities of claims in the event the customer becomes insolvent. Suppliers cannot require the customer to pay any outstanding pre-insolvency amounts as a condition of further supply.

Exceptions

While under the ERRA there is an obligation on a supplier to continue the essential supplies there are exceptions to this obligation. The supplier, if it falls within the list, is entitled to:

(a)     subject to certain exceptions to be clarified in secondary legislation, require a personal guarantee from the insolvency practitioner as a pre-requisite to continue supply following the customer’s insolvency; and

(b)     cease providing the post-insolvency services in the event that they have bills unpaid for more than twenty eight (28) days following the due date.

These exceptions mean that an insolvency practitioner is unlikely to require a supplier to provide the essential services unless they have a genuine belief that there is a realistic chance of saving the customer.  It remains to be seen to what extent insolvency practitioners will be willing to give personal guarantees (as their general position is not to agree to any personal liability on the basis that they are acting as agent of the company).  This is particularly the case for voluntary arrangements where management retains control of the business with the insolvency practitioner acting as supervisor. 

What do these ERRA Changes mean for IT Customers/Suppliers

While the exact scope of the ERRA amendments relating to the scope of ‘electronic means’ will not be known until following the Government’s consultation it would be prudent for either customers or suppliers to review their standard terms and existing agreements to consider:

  • the validity of any clauses contained in the terms which grant a supplier termination right on insolvency related events as a matter of course – which the new ERRA/IA provisions might negate;

And suppliers might look to consider if their terms should contain:

  • a requirement for the customer to ensure that any insolvency practitioner appointed will provide a personal guarantee to cover the cost of supply in an event of insolvency;
  • a right to terminate in the event the insolvency practitioner does not provide the guarantee; and
  • a right to terminate in the event that the post-insolvency fees are overdue by twenty eight days or more.

 

Sources:

Enterprise and Regulatory Reform Act 2013 – Section 92

http://www.legislation.gov.uk/ukpga/2013/24/section/92/enacted

Enterprise and Regulatory Reform Bill

http://www.publications.parliament.uk/pa/bills/lbill/2012-2013/0083/amend/su083-ib.htm

The Insolvency Service – Support for the rescue of viable insolvent businesses
http://news-insolvency.bis.gov.uk/Press-Releases/Support-for-the-rescue-of-viable-insolvent-businesses-6886b.aspx

Hansard
http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130311-0002.htm