Update: IT Suppliers beware! Your right to terminate on a customer insolvency is changing…

In September 2013 we reported on the Enterprise and Regulatory Reform Act 2013 which provided the Government with the power to extend the law regarding the supply of essential services to insolvent customers.

These reforms were anticipated to come into force in April 2014. It has now been announced that the changes will come into force on 1 October 2015.

Extension of essential supplies

Currently the Insolvency Act 1986 protects the supply of gas, water, electricity and communication services to an insolvent customer. It has the effect of voiding the often seen clause that a supply agreement will terminate automatically in the event the customer enters administration or a Company Voluntary Arrangement (the clause is valid, however, where liquidation takes place, as liquidation is a terminal process).

The Insolvency (Protection of Essential Supplies) Order 2015, by virtue of the Enterprise and Regulatory Reform Act 2013, extends this protection to supplies provided "for the purpose of enabling or facilitating anything to be done by electronic means". The Order specifically protects the customer's:

• point of sale terminals;
• computer, hardware and software;
• information, advice and technical assistance in connection with the use of information technology;
• data storage and processing; and
• website hosting. 

Exceptions

Whilst there is an obligation on the supplier to continue the "essential supplies" there are exceptions to ensure that the suppliers are afforded some protection. The supplier is entitled to:

• request a personal guarantee from the insolvency practitioner as a pre-requisite to continue supply following the customer’s insolvency;
• terminate the contract if the insolvency office-holder consents to such termination;
• apply to the court for permission to terminate the contract based on the grounds that its continuation would cause hardship to the supplier; and
• cease providing the post-insolvency services in the event that bills are unpaid for more than 28 days following the due date.

The good news is that these exceptions mean that an insolvency practitioner is unlikely to require a supplier to provide the essential services unless they have a genuine belief that there is a realistic chance of saving the customer. Furthermore, costs incurred following the initiation of an administration should rank as the costs of the administration and therefore should be paid in priority to all other claims, other than those of fixed charge holders. 

Key points to consider

Suppliers should consider what their standard terms currently state about termination for insolvency and how these changes might impact them. It may be worthwhile to ask your finance teams whether they can quantify any previous losses of this kind to see if they are material. Adding an explicit right to terminate a contract in the event that the post-insolvency fees are overdue by 28 days or more is advisable. For suppliers who, as standard, invoice quarterly in arrears, special consideration should be given to these changes on the basis that even with the 28-day termination right for invoices unpaid, this effectively means a 4 month risk on non-payment.

The changes to the Act will come into effect for new contracts entered into on or after 1 October 2015.