The consultation on the new powers introduced by the Enterprise and Regulatory Reform Act 2013 to help ensure the continuity of certain essential IT supplies to insolvent business closed today, 8 October.

Section 233 of the Insolvency Act 1986 (the “Act”), currently allows for an administrator to receive continued utility supplies by agreeing to pay the future charges.  This provision was implemented on the recommendation of the Cork Committee in order to prevent utility suppliers demanding ransom payments i.e. demanding payments of outstanding charges as a condition for continuing supply and thereby putting themselves in a preferential position to other unsecured creditors.

The reality of operating a business has changed substantially since the early eighties and there are a number of essential supplies which are not covered by the existing legislation. In most business the continued provision of IT goods and services is essential to allow the business to continue to operate.

The consultation paper proposed that:

(1)        the supply of certain IT goods and services will be added to the list of essential services – this will result in those IT suppliers be unable to demand payment of outstanding amounts to continue supply but would rather have to view the insolvency practioner as a new client (this provision would also apply to on-sellers of IT goods and services);

(2)        suppliers contractual rights to terminate the provision of essential supplies when customer enters administration or a voluntary arrangement becomes effective will cease to have effect; and

(3)        the existing provisions would be extended to on-sellers of utilities.

What are the proposed new essential supplies?

The proposed amendments to the Act would extend the list of essential supplies to those listed below where the supply is for the purpose of enabling or facilitating anything to be done by electronic means namely –

(a)        point of sale terminals

(b)        computer hardware and software

(c)        any service enabling the making of payments

(d)       information, advice and technical assistance in connection with the use of information technology;

(e)        data storage and processing

(f)        website hosting

These provisions will also apply to on-sellers of these services and the current provision relating to the provision of utilities will be extended to also apply to on-seller.

Termination clauses

The proposed amendments also contemplate overriding insolvency related terms that a supplier could exercise when a customer enters an insolvency process. The proposed amendments only apply in the context of ‘business rescue’ procedures i.e. administration or a company voluntary arrangement. Liquidation is not recognised as a business rescue procedure and so these provisions will not be applicable if a customer enters liquidation.

An insolvency related term is described in the proposed legislation as:

(a)        a term which automatically terminates a contract as a result of the customer entering administration or a company voluntary arrangement becoming effective

(b)        a term which gives the supplier a right to terminate as a result of the customer entering administration or a company voluntary arrangement becoming effective

(c)        a term which gives the supplier a right to terminate because of an event that occurred before the customer entered administration or a company voluntary arrangement became effective

Where the customer enters administration or a company voluntary arrangement take effect, the insolvency related term will cease to have effect and the contract or supply will only be able to be terminated in line with the new proposed amendments to the Act.

In order to terminate the contract the insolvency practioner will need to consent to the termination; the court grant permission to terminate or if the charges in respect of the supply remain unpaid for 28 days from when they are due.

In order for the supply to be terminated the supplier will need to give the insolvency practioner notice, within 14 days of the insolvency event, that the supplier requires a personal guarantee from the insolvency practioner failing which the supply will be terminated and the insolvency practioner does not give the guarantee within 14 days of receiving the notice.

What next?

The consultation has now closed and the government is analysing the feedback received. It is anticipated that the new legislation will come into force in May 2015 in substantially similar form to the proposed amendments. Suppliers of IT services should be considering the impact of the proposed new amendments on their business and considering whether any changes need to be made to supply operations to take into account these changes.