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IT outsourcers beware: the impact of the Insolvency (Protection of Essential Supplies) Order 2015

Highly significant to the IT industry is one of the last acts of the Coalition Government which allowed a small amendment to the Insolvency Act 1986 (the “Act”) to be passed. For some time the law has protected insolvent companies from being held to ransom by suppliers of certain essential supplies (gas, electricity, water) by requiring the continuing supply of such services provided that future payment for these services is guaranteed. The Insolvency (Protection of Essential Supplies) Order 2015 (the “Order”) amends section 233 of the Act and extents these measures to essential IT suppliers.

The Order appears to reflect modern commercial reality and adds IT services to the list of ‘essential’ supplies. This will have wide implications for IT businesses who will be prevented from exercising contractual rights to terminate the supply of their services to insolvent companies.

The changes to the Act will come into effect for new contracts entered into on or after 1 October 2015.

Effect on IT suppliers​

The changes to the Act means that suppliers in the IT sector will be required to continue to provide certain ‘essential’ supplies to a customer even 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 such 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 rationale for the amendments introduced under the Order is that certain IT services should now be regarded as essential operational business services, and therefore warrant the same degree of protection in insolvency as traditional utilities. 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. 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.

What type of supplies are affected?​

The Order adds to the list of utility supplies, by including the supply of goods or services where the supply is “for the purpose of enabling or facilitating anything to be done by electronic means” – essentially IT supplies. The goods and services explicitly referred to are:

  • point of sale terminals,
  • computer hardware and software,
  • information, advice and technical assistance in connection with the use of information technology,
  • data storage and processing, and
  • website hosting.

Exceptions

While the changes to the Act mean that 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 of ‘essential’ supplies, is entitled to:

  • request a personal guarantee from the insolvency practitioner as a pre-requisite to continue supply following the customer’s insolvency;
  • terminate the contract if the insolvency office-holder consents to such termination,
  • to apply to the court for permission to terminate the contract based on the grounds that its continuation would cause hardship to the supplier, and
  • cease providing the post-insolvency services in the event that bills are unpaid for more than 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 changes mean for IT customers/suppliers?

The Order voids any contractual term that, in the event of the customer entering into administration or a voluntary arrangement, would automatically terminate the supply agreement, would grant the supplier a right to terminate the supply agreement, or would enable the supplier to make changes to the supply terms (including by increasing charges). However, the Order seems to be silent on suppliers exercising contractual rights of suspension.

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 rights on insolvency-related events as a matter of course – which the provisions of the Order might now negate.

In addition, 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/or
  • a right to terminate in the event that the post-insolvency fees are overdue by 28 days or more.

For more information please contact Andrew Joint or Lee Rubin.