Until recently essential supplies defined under the Insolvency Act 1986 (“the Act”) for businesses placed into any form of insolvency were restricted to utility suppliers –ie. electricity, gas, water and public electronic communication services. This meant that when a business was placed into insolvency an insolvency office-holder could require the supplier of essential services to keep providing them. The supplier was entitled to insist that the office-holder personally guaranteed payment of any further supplies but could not insist on any pre-existing unpaid charges being paid.
From 1 October 2015, the Act has been amended and the definition of suppliers of essential services has been extended. Other amendments will restrict suppliers’ rights to terminate contracts and recoup unpaid charges.
Requirement to continue to supply services
The Act extends the definition of essential suppliers to include all private suppliers of utilities and communication services. Accordingly, it now applies to all businesses that supply:
- Point of sale terminals
- Computer hardware and software
- IT support
- Data storage and processing and
- Website hosting
if the supply is “for the purpose of enabling or facilitating anything to be done by electronic means”.
Restrictions on termination of contracts
It is not unusual for suppliers to include a term in their contracts which gives the supplier the right to terminate if the customer enters any form of insolvency, a so-called “insolvency related term”. From 1 October 2015 any insolvency related term will be void in essential supplies contracts if the customer enters administration or a Company Voluntary Arrangement (“CVA”) is implemented.
A term will be an insolvency related term if:
- The contract or supply automatically terminates because the customer enters into administration/CVA. This would also include any term which provides for something else to occur if the customer enters into any form of insolvency – eg. an increase in fees
- The supplier would be entitled to terminate or, at the suppliers’ option any other thing would happen (eg. an increase in fees) because of the administration/CVA
- The supplier would be entitled to terminate because of an event that happened before the administration/CVA
In any such circumstances a supplier will only be entitled to terminate the contract if the office-holder consents, the court gives permission or charges incurred after the administration/CVA are not paid within 28 days.
Alternatively, the supplier may 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 does not give that guarantee within 14 days.
The extended definition of essential supplies is somewhat vague in definition and leaves some areas of uncertainty as to which supplies are covered. For example, what happens in contracts providing for the supply of mixed services, only some of which may be protected services covered by the Act, where there may or may not be multiple termination provisions? Does “for the purpose of enabling or facilitating anything done by electronic means” mean the sole purpose or one of the purposes? We are likely to see litigation over the coming months to seek clarification of these issues but until then suppliers will need to proceed with caution.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.