The Insolvency (Protection of Essential Supplies) Order 2015 which comes in to force on 1 October 2015 significantly changes the options available for suppliers of IT services in relation to their rights against insolvent customers. Any IT supplier caught within the definition of the new legislation will need to beware that they can no longer insist on payment of outstanding invoices as a condition of continued supply to an insolvent business, nor rely on clauses applying automatic price rises upon insolvency of the customer.

IT suppliers have to date fallen outside of the provisions protecting the supply of essential services to insolvent businesses, which had previously been applicable to statutory suppliers of utilities only. In recognition of the necessity for continued supply of IT services to enable businesses to operate, from 1 October 2015 IT suppliers will be brought into the extended protection of the supply regime.

What?

The Enterprise and Regulatory Reform Act 2013 provided for the introduction of secondary legislation to enable additions to the existing Insolvency Act 1986 protections for essential supplies. The Insolvency (Protection of Essential Supplies) Order 2015 is the resulting secondary legislation which brings in additions to the present s233 and inserts a new s233A into the Insolvency Act 1986.

The new legislation is intended to recognise that modern businesses require IT services as much as they require continued supply of utilities in order to enable them to continue in business. To that extent a new list of suppliers is added to the list of essential suppliers in s233, including certain suppliers of IT services. This means that from 1 October 2015 suppliers of IT services will not be able to make payment of pre-insolvency invoices a condition of continued supply.

In addition, the insertion of the new s233A is intended to address concerns of insolvency practitioners that certain essential suppliers were charging higher prices post-insolvency than they had pre-insolvency. Essentially, the new s233A seeks to lock essential suppliers into their pre-insolvency contracts and remove the right to rely on an insolvency event as a trigger to charge higher prices. As this new provision impinges upon the freedom of suppliers to negotiate their own commercial terms (and so price risk), s233A will only apply to contracts entered into on or after 1 October 2015.  

Safeguards are built into the legislation, mainly the ability to request a personal guarantee from the insolvency practitioner to pay for post insolvency services, the ability to terminate supply for non-payment of post insolvency invoices and to apply to the court for relief (failing agreement between the supplier and the insolvency practitioner). However, it is acknowledged that despite these safeguards IT suppliers are likely to face increased hardship caused by new legislation.

So what?

Suppliers of IT services should determine whether the services they supply fall within the new legislation. The legislation states that an a IT supply falls within the regime if it is a supply for the purpose of enabling or facilitating anything to be done by electronic means, and then goes on to list data storage and processing, website hosting, computer hardware and software, assistance or advice in connection with IT and point of sale terminals. Except for the specific exclusion of merchant acquirers, this definition covers most IT supplies to businesses.

If suppliers fall within the definition, they should immediately take steps to review their existing customer supply contracts and insolvency procedures before 1 October 2015. It may be possible to better protect against the provisions of s233A if certain pre-insolvency triggers are included within supply contracts and by putting overarching framework agreements in place which will predate the changes on 1 October 2015 and so take the supply contract outside of the remit of s233A.