English insolvency law is about to change, making it harder for IT suppliers to stop supplying when a customer goes into an insolvency procedure. The aim is to help administrators and others to secure the supply of IT products and services that might be needed to rescue failing businesses.
The changes come in on 1 October 2015, but IT suppliers can take steps now to protect their position. IT customers might expect to see their suppliers trying to re-negotiate their terms. And anyone acquiring a business should add this to their list of things to think about on due diligence.
The changes will:
- extend the meaning of ‘essential supplies’ under the Insolvency Act 1986: these currently cover essential utilities, like gas and water, and will be extended to include IT products and services like hardware, software, IT support, data storage and processing, and website hosting;
- restrict IT suppliers’ rights to terminate contracts, or supplies under them, when customers enter certain insolvency procedures; and
- make it harder for IT suppliers to recoup unpaid charges incurred before an insolvency procedure.
IT suppliers can be required to keep providing services to customers in insolvency procedures
Currently, if a business enters administration, administrative receivership, liquidation or a company voluntary arrangement (CVA), the insolvency office-holder can require a supplier of ‘essential’ services to keep providing them. This applies to certain statutory suppliers of utilities: electricity, gas, water and public electronic communication services.
The supplier may make it a condition of further supply that the office-holder personally guarantees payment of any future charges. However, the supplier can’t require past unpaid charges to be paid.
From 1 October 2015, the list of suppliers will extend to private suppliers of utilities and communications services, and to businesses that supply:
- point of sale terminals;
- computer hardware and software;
- IT support;
- data storage and processing; or
- website hosting,
if the supply is ‘for the purpose of enabling or facilitating anything to be done by electronic means’.
Right to terminate is restricted if customer enters administration or CVA
Under the new rules, insolvency-related terms in essential supplies contracts will be void if the customer enters administration or if a CVA is implemented. This will apply to contracts entered into from 1 October 2015.
An insolvency-related term is a provision under which:
- the contract or supply automatically terminates, or any other thing would happen (eg fees would increase), because the customer enters administration / CVA;
- the supplier would be entitled to terminate, or - at the supplier’s option - any other thing would happen (eg fee increase), because of the administration / CVA; or
- the supplier would be entitled to terminate because of an event that happened before the administration / CVA.
The changes will bite only when a company enters into administration or a CVA: they won’t affect termination rights based on early insolvency triggers before the customer enters a formal process.
If an insolvency-related term is void, the supplier may still terminate the contract if:
- the office-holder consents;
- the court grants permission; or
- charges incurred after the administration/CVA aren’t paid within 28 days.
If a term is void, the supplier may still terminate the supply if:
- the supplier has notified the office-holder that it will terminate unless the office-holder personally guarantees payment; and
- the office-holder doesn’t give that guarantee within 14 days.
What can IT suppliers do to protect their position?
Steps to take before 1 October 2015
- Check if your current contracts have insolvency-based termination rights. If not, consider re-negotiating to include those rights now: you will be able to rely on them after 1 October.
- Include those rights in any new contracts you enter into before 1 October.
- Check if you have contracts covering both essential and non-essential services. It’s unclear how the new rules will apply to these ‘cross-pollinated’ contracts. It might make sense to separate the services, at least in relation to payment provisions.
Steps to take after 1 October 2015
- Pre-insolvency: keep a close eye on unpaid bills and ensure that (as far as possible) there are no arrears.
- During ‘twilight zone:’ after insolvency but before formal insolvency process: check if your contract has an early termination right, eg on the customer ‘becoming insolvent’. The new rules kick in only when the customer enters a formal insolvency procedure.
- Post insolvency appointment: contact the office-holder as soon as you’re aware of his appointment to:
- ask him to confirm if he’ll need the supply to continue; and
- ask for a personal guarantee.
Watch this space – some issues are still unclear
We’re likely to see litigation to clarify various issues, including:
- Which suppliers are covered? Eg what does ‘communication service’ mean?
- What happens to cross-pollinated services, particularly if the protected supply is only a small part of the contract?
- Does ‘for the purpose of enabling or facilitating anything done by electronic means’ mean the sole purpose or one of the purposes?
As we wait for some answers, suppliers should act now to put themselves into the best position once the changes come in.