When companies are hit by financial difficulties, there can sometimes still be a realistic chance of saving the business, but the ailing company might find that it can only do that when its essential utilities are still working.
The Insolvency Act 1986 currently prevents the immediate termination of water, electricity and gas. However, the vital function that communications, IT and technology supply services have in the 21st century economy is recognised in the Insolvency (Protection of Essential Supplies) Order 2015 (2015 Order). The order comes into force on 1 October 2015 and voids any contractual provision that allows for termination or suspension of the IT and communication supply services in the event of administration or voluntary arrangement with creditors.
When do the new protections apply?
The 2015 Order is designed to assist businesses that still have a realistic chance of being saved from insolvency (where the loss of business critical ICT might otherwise be fatal to such prospects). It therefore applies only to a business that (1) goes into administration or (2) enters into a voluntary arrangement approved and governed under Part 1 of the Insolvency Act 1986.
Clauses addressing other insolvency scenarios (for example liquidation or a bankruptcy order) are unaffected by the 2015 Order.
What essential IT services are covered?
The IT and communication technology services covered under the 2015 Order are:
- point of sale terminals;
- computer hardware and software;
- data storage and processing;
- website hosting; and
- information, advice and technical assistance in connection with the use of information technology.
Balancing needs – protecting the supplier
The 2015 Order does not force suppliers to provide their goods and services for an unlimited period or incur further losses by continued supply to a financially ailing business.
A supplier may still terminate the contract where:
- The administrator or the supervisor of the voluntary arrangement agrees; or
- A court grants permission for the contract to terminate (only permitted where the continuation of the contract causes hardship); or
- Any bills for the continued supply after the company entered administration or voluntary arrangement are not paid within 28 days from the date payment is due.
In addition, a supplier may still terminate the supply where
- The supplier serves a written notice on the administrator, stating that the supply will be terminated unless he gives a personal guarantee for payment of any charges relating to continuing supply after the company entered into the administration or voluntary arrangement; and
- The guarantee is not given within 14 days after the day where the notice was received.
This ensures that an administrator or voluntary arrangement supervisor will think twice and only demand continued supply of services if there is a realistic chance of saving the business.
Because of its limited application, the 2015 Order may not provide organisations with complete protection in a recovery and resolution situation. It therefore remains advisable to write provisions into supply contracts that limit a supplier’s right to immediately terminate in the event that a company is in financial distress and to oblige the supplier to provide exit assistance once notice of termination has been served.
The 2015 Order may indirectly offer a company protection from failures further down the supply chain (e.g. where a supplier’s supplier might wish to terminate a contract in case of administration or voluntary arrangement).
For suppliers of ICT services, a review of the standard terms and conditions is advisable to determine how various insolvency scenarios impact the business and what protection those terms and conditions offer in light of the 2015 Order. For example, consider writing in a right to terminate a contract in the event that the post-insolvency fees are overdue by 28 days or more.
Depending on the invoicing structure (e.g. quarterly), the “28 days” limit mentioned above might mean a prolonged period of non-payment. A switch to monthly invoicing can be favourable for cashflow purposes.
If you would like to understand how the 2015 Order might affect your business as a supplier or a recipient of essential ICT services, please do not hesitate to get in touch with Martin Sloan or your usual Brodies contact.
On September 28, 2015