Blog: Supplies of IT services and customer insolvency – guarding the essentials

The availability of IT and communication supply services during insolvency situations can often determine whether a business can continue to trade while implanting rescue measures or whether it has to dissolve itself. A new section, 233A, to the Insolvency Act 1986 comes into force this week to afford essential utilities some protection, with consequences for suppliers, as Martin Sloan and Ben Bestgen discuss.

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:

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:

In addition, a supplier may still terminate the supply where

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.

Key points

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.