Written by Duncan Pithouse, Tim Dawson and Annabel Ashby

The UK Government has released a long awaited consultation document proposing new controls on IT suppliers’ dealings with customers facing insolvency.

To a degree this brings the termination provisions of the UK’s insolvency rescue regimes (administration and company voluntary arrangements) in line with some other jurisdictions, such as the US, which, broadly, do not allow supplier termination for customer insolvency.

In context

For many years the Insolvency Act 1986 has provided that suppliers of utilities such as gas, electricity, water and telecommunications (those that were formerly publicly owned, but not their on-sellers) may not demand payment of all arrears built up before the commencement of the insolvency proceeding before agreeing to make further supplies to the insolvent business.  However they can require insolvency practitioners to give a personal guarantee for future supplies.

The Government now seeks views on proposed amendments to that legislation. It is proposed that:

• certain IT goods and services will join utilities in being essential supplies – so that the suppliers of these IT goods and services will no longer be able to demand, as preconditions to continued supply, payment of accrued but not yet paid charges in arrears and / or increase their charges to bring about the same effect;
• suppliers’ contractual rights to terminate essential supplies will cease to have effect where customers enter the insolvency process.

Proposed essential supplies

The proposed new sections to the Insolvency Act extend the meaning of “essential supplies” to supplies that fall into one of the following categories and are for the purpose of enabling or facilitating anything to be done by electronic means:

• IT hardware and software
• point of sale terminals
• data storage and processing
• website hosts
• those who supply IT advice and technical assistance
• any service enabling the making of payments.

Unlike the current regime, the proposed new approach will also apply to “on-sellers” of such services (meaning the parties that directly supply the customer).  On-sellers fall outside of the existing regime because it was implemented before they were commonplace.

Controls on termination

The draft legislation goes further than merely categorising certain IT supplies as essential supplies. It is also proposed that an essential supply provider will not be able to operate some common contractual clauses which are, ordinarily, triggered by customer insolvency.

The proposed controls would override “insolvency related terms” (see box).

The proposal describes an “insolvency related term” as: a term where the customer’s administration or voluntary arrangement automatically terminates the supply or contract, or automatically triggers “any other thing” a term where the customer’s administration / voluntary arrangement triggers the right to        terminate the supply, the contract, or triggers “any other thing”; a term allowing the supplier to terminate the contract or the supply because of an event that occurred before the administration / voluntary arrangement.

It is proposed that, where a customer is in administration or enters voluntary arrangement (but not in other instances, e.g., liquidation), the insolvency related contract terms will be replaced with the statutory process described below.

To terminate a supply the supplier will need, within 14 days of the insolvency event, to serve a notice upon the insolvency practitioner. If the insolvency practitioner fails to personally guarantee payment for the supplies within 14 days of receiving the notice, supplies can then stop.

A contract can be terminated in one of three ways. The court can consent (but it will only do so where the supplier will otherwise suffer undue hardship); the insolvency practitioner can consent; or the supplier must wait for its charges incurred after the insolvency event to have remained unpaid for 28 days.  

Key points

The following points are key:

• The changes are proposals, not in final form.
• Only contracts entered into after the new legislation comes into force will be affected.
• The amendment potentially provides a short term procedural lock-in of suppliers in the event of customer insolvency;
• It is currently unclear whether parties will be able to contract out of the provisions.

Comment and next steps

The proposals in question cover a broad range of contractual terms, which could impact a range of supplier rights under the agreement.

In real terms, assuming the insolvency practitioner refuses to give a personal guarantee, it seems as if the supplier’s exposure is 14 days plus whatever charges may have been accrued up to the administration or voluntary arrangement.  (14 days does assume that the supplier is immediately aware of the customer’s insolvency, which might not be the case.)  This short term “lock in” of the supplier could clearly represent a significant amount of money depending on the deal.  However, bear in mind that for most large scale on-going IT outsourcing deals, supplier termination rights are linked only to persistent and material non-payment and so the proposed law probably does not change the supplier’s position in real / practical terms too much.  In fact, it could even serve to generate a better position for suppliers by allowing termination under the statutory new regime before the contractual right would have taken effect. (Unless it is possible to contract out of the provisions.)

For smaller IT deals with more “standard” contractual termination rights triggered by insolvency events, and in respect of smaller suppliers who cannot sustain customer insolvency, the proposed provisions will obviously have a much more significant impact.

The consultation closes 8 October.

Our Technology & Sourcing team and our Restructuring Group are analysing and monitoring this proposal together.  For specific advice or assistance with any formal response please get in touch with a member of either team or your usual DLA Piper contact:

Duncan Pithouse, partner Technology & Sourcing;

Tim Dawson, partner Restructuring;

Annabel Ashby, Senior Professional Support Lawyer, Technology & Sourcing.