The Insolvency Act 1986 already contains restrictions on providers of public electronic communications services, but the Order extends those restrictions to, and imposes new ones on, most IT businesses.
The existing rules prevent a supplier of such services from compelling an insolvent business to pay charges incurred before an insolvency event by threatening to terminate the supply for non-payment.
Effect of the Order
1. Extension of the prohibition on compelling payment by threatening termination
The Order comes into effect on 1 October 2015 and extends the above provisions to:
- Private suppliers of communications services.
- Providers of the following goods or services supplied for the purpose of enabling or facilitating anything done by electronic means:
- point of sale terminals
- computer hardware and software
- information, advice and technical assistance in connection with the use of IT
- data storage and processing
- website hosting
As you will see, the above list is extremely wide and will catch almost all IT businesses.
The supplier must continue to provide the goods and services if the insolvent company's office-holder makes a request. The supplier can make it a condition of the continuing supply that the office-holder provides a personal guarantee for the payment in respect of any supply made during the insolvency. The supplier cannot make it a condition that any outstanding charges incurred before the insolvency is paid.
These existing provisions apply when the business enters administration; an administrative receiver is appointed; a moratorium is in force; a voluntary arrangement takes effect; a company goes into liquidation or a provisional liquidator is appointed.
2. Restriction on termination and other "insolvency-related terms" (only applies to contracts entered into on or after 1 October 2015)
The second change made by the Order is the introduction of a restriction on certain contract terms which applies when a customer for the goods and services specified above becomes insolvent. If one of these events occurs, the supplier cannot terminate the supply or contract, alter the terms of the contract or compel higher payment for the supply, unless certain conditions are met. These conditions include obtaining the consent of the insolvency office-holder or the court, any charges incurred after the insolvency event remaining unpaid for 28 days, and the insolvency office-holder failing to give a personal guarantee in respect of the charges for the continuation of the supply following the insolvency.
This second change only applies when the client enters administration or a voluntary arrangement takes effect, so, provided that the contract terms allow the supplier to take any of the above steps, the supplier would be able to rely on those terms if the business is affected by a different insolvency procedure, e.g. liquidation.
This is a simplified explanation of a change in the law that will have an impact on most IT businesses. As the Order has not yet come into force, we will need to monitor how it takes effect in practice.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.