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Holding rescue to ransom?

Vernon Dennis, head of the corporate recovery & reconstruction practice at law firm HowardKennedyFsi, asks what effect the extension of Section 233 of the Insolvency Act to cover a wider range of creditors may have on suppliers of IT, telecoms and utilities services

Vernon Dennis
Head of corporate recovery & reconstruction

The Government’s consultation process into proposed amendments to Section 233 of the Insolvency Act 1986, which regulates the conduct of suppliers of essential services in regards to an insolvent customer, closed on 8 October. But while we might think that closed the discussion, it seems – to paraphrase the old idiom – the corpulent chanteuse is yet to descant.

A survey undertaken in August 2013 by R3 concluded that, on average, 46% of IT suppliers, 26% of telecoms suppliers and 14% of utility suppliers withdrew supplies from companies that sought to trade during an insolvency process. A higher proportion still sought to demand ‘ransom’ payments, or renegotiate higher tariffs or more restricted terms. This was said to imperil business rescue.

In tackling this problem and responding to both the huge changes to the utilities sector since 1986, and the almost universal dependence of companies upon IT services, The Enterprise and Regulatory Reform Act 2013 (ERR Act) has been enacted, allowing the Secretary of State for Business, Innovation and Skills to amend Section 233 by statutory instrument.

Section 233 currently only applies to narrowly defined statutory undertakers and similar bodies who have an obligation to provide services to the public – specifically suppliers of gas, electricity, water and public telephone communications.

Where a company goes into an insolvency process, such suppliers may not make it a condition of future supply that outstanding charges arising prior to the commencement of the insolvency process are paid. The supplier is, however, entitled to seek a personal guarantee from the insolvency office holder.

The consultation sought comment on the following proposals:

1. To extend the application of Section 233 to any supplier of utility or telecom services (not just statutory undertakers) in order to cover intermediate providers or so called on-sellers. It is not intended to apply to supplies made for wholesale purposes.
2. To provide that the legislation applies to suppliers and on-sellers of IT goods and services; comment has been sought on the type of IT goods and services which should be covered.
3. To render void any contractual provision that provides a supplier the right to terminate a contract of supply, and /or changes the terms and conditions of supply in the event of the customer entering administration or voluntary arrangement.

As this will impose an effective obligation to supply on existing terms, without an ability to demand payment of any arrears, a number of safeguards have been proposed, including (a) the ability to seek a personal guarantee from the insolvency office holder within 14 days from the onset of the insolvency process; (b) the ability to withdraw supply after 28 days if supply charges are unpaid, and© the ability of the supplier to apply to court for permission to terminate the contract if they believe that the continuing obligation to supply will cause undue hardship.

It is hoped that the proposed changes will save jobs and maximise creditor value – which will in turn contribute to economic growth. Intervention will however have an undoubted impact on suppliers. In the past the suppliers of IT goods and services have enjoyed an ability to extract payment from an insolvent business in preference to other creditors merely by virtue of the importance of such service provision. These suppliers will clearly need to consider the terms upon which they supply and not simply rely on their economic power.

By rendering void termination clauses on the event of insolvency, one may find that suppliers seek to terminate at an early time and will be tougher on customers. The big question is – will suppliers increase the cost of supply to compensate for their loss of rights?

Posted on 7th October 2014 by

 

 

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