After years of lobbying by Association of Business Recovery Professionals and others, the Enterprise and Regulatory Reform Act 2013 (ERRA) received Royal Assent in April 2013.  Most importantly, the ERRA gives the Secretary of State power to amend s233 of the Insolvency Act of 1986.  Section 233 was originally introduced in 1986 in an attempt to assist insolvency practitioners achieve a business rescue by ensuring continuity of supply of utilities and telephone services to enable trading during a formal insolvency.  In the years since the provision was originally enacted, information technology goods and services have become an essential part of business life.  Without computers, the internet, websites and domain names, businesses would grind to a halt, whether they are involved in ecommerce or not.  Demanding “ransom” payments or varying the terms of supply to increase tariffs and recoup arrears can put even greater pressure on the finances of an insolvent business at a critical time, damaging the chances of survival by preventing funds from being used to facilitate a rescue.  Such payments may also result in certain creditors effectively receiving “preferential” treatment at the expense of other creditors, obviating the basic insolvency principle of all creditors in the same class being treated equally and potentially resulting in lower returns to other creditors.

The Insolvency Service held a consultation from July to October 2014 called Continuity of Supply of Essential Services to Insolvent Businesses in which a draft regulation called the Protection of Essential Supplies Order 2014 was circulated.  This draft regulation would amend Section 233 to include: “a supply of goods or services … by a person who carries on a business which includes giving such supplies, where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.”  The additional goods and services to be included are:

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

The wider aim of the draft regulation is to enhance the prospects of successful business rescue, leading to improved returns to all creditors and greater employment preservation.  The draft regulation would:

  • prevent essential utility and IT suppliers from withdrawing supply to insolvent businesses by relying on contractual termination clauses;
  • prevent essential utility and IT suppliers from demanding ‘ransom payments’ as a condition of continuing supply; and
  • clarify that “on-sellers” (intermediate providers) of these essential services would also be subject to the provisions of Section 233.

The Insolvency Service is currently analysing the feedback received.  Whilst there is no commencement date set, the government has said it wants new legislation amending Section 223 in force before May 2015.  There is no doubt that, when and if this new regulation comes into force, this will mean a big change for IT and other tech companies faced with insolvent customers.  These companies have become used to having huge commercial advantage to renegotiate terms or demand payment of arrears due to their ability to terminate supplies of essential IT services.  Under this proposed new law, they will no longer have this advantage.  The new regulation may well put additional pressure on IT companies which are themselves struggling financially.  Whilst the proposed regulation contains some protections for IT suppliers forced to continue to supply insolvent customers, this will be a big change for the IT industry.  However, their interests are being rebalanced for the greater good of the insolvent business and its creditors as a whole, including its employees