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Insolvency Rules -The Insolvency (Protection of Essential Supplies) Order 2015 – IT Suppliers Beware

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As of 1 October there are changes to insolvency rules to be aware of...

As of 1 October there are changes to insolvency rules where suppliers of IT related goods and services which include computer hardware, software, servers and website hosting services are caught by new insolvency legislation which restricts an IT supplier’s under a contract where a customer becomes insolvent. 

Insolvency Rules – Insolvency Order 2015 Background

The Insolvency (Protection of Essential Supplies) Order 2015 (the “Order”) prevents suppliers of essential supplies (such as utilities) from using the critical nature of their services to negotiate an unfair advantage when a business becomes insolvent.

Previously the insolvency rule Under the Insolvency Act 1986 was that only suppliers of public electronic communication services were prevented from compelling an insolvent business to pay charges incurred before an insolvency event by threatening to terminate the supply for non-payment. The Order has now extended the definition of suppliers to catch almost all IT businesses.

Impact upon Contracts

In respect of any type of insolvency, the Order requires IT suppliers to continue to provide services if the appointed insolvency practitioner (“IP”) makes a request for it to do so. Suppliers are able to make it a condition of the continuing supply that the appointed IP provides a personal guarantee for the payment in respect of any supply made during the insolvency. However, the supplier cannot make it a condition that any outstanding charges incurred before the insolvency are paid.

The insolvency rules now state that where a customer enters administration or where its creditors approve a voluntary arrangement, the new insolvency legislation contains provisions that void any contract terms that allow suppliers to withdraw their supply, alter the terms of the contract or demand higher payments for the supply.

Instead, if a business enters administration or a voluntary arrangement, the supplier may terminate the contract in the following ways:

  1. obtaining the consent of the insolvency office-holder to the termination of the contract;
  2. applying to court for permission to terminate the contract on the grounds that its continuation will place the supplier in an equally distressed position; or
  3. where any bills for the supply that are incurred after the company entered administration or voluntary arrangement are not paid within 28 days from the date payment is due.

These new rules will only apply to contracts entered into after 1 October 2015. To allow IT suppliers to protect their position they should carefully consider any insolvency related rights that are contained in their standard terms of supply.

In practical terms, suppliers need to be alert to their customers becoming insolvent and should make sure they have a plan in place.

Before a customer has entered formal insolvency suppliers should check if their contract has any early termination rights as the new rules only apply once the customer enters a formal insolvency procedure. Once a customer has entered formal insolvency suppliers should contact the appointed IP as soon as possible to request a personal guarantee.

If you have any questions or would like to discuss how the new legislation and insolvency rules may affect your business, please contact me, David Cunningham, on 0113 336 3430 or via email at david.cunningham@clarionsolicitors.com

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.