The Insolvency (Protection of Essential Supplies) Order 2015—what is its effect?

The Insolvency (Protection of Essential Supplies) Order 2015—what is its effect?

The Insolvency (Protection of Essential Supplies) Order 2015, SI 2015/989 (I(PES)O 2015) was made on 26 March 2015, and will in accordance with article 1(1) come into force on 1 October 2015. The purpose of I(PES)O 2015 is stated in its explanatory memorandum to:

  • amend the Insolvency Act 1986 (IA 1986) 'to prevent essential IT and utility suppliers of businesses on certain formal insolvency procedures from exercising contractual rights terminate the supply or to increase charges to the insolvent company on account of the insolvency', and
  • 'ensure that insolvency practitioners are able to secure supplies that are essential to facilities a prospective rescue of the business' and provide 'safeguards for those suppliers who will be affected to ensure they may terminate the contract or the supply in certain specific circumstances'

Why have these changes been brought in?

When a company or an individual enters into an insolvency process, suppliers of gas, electricity and water are unable to demand payment of any outstanding charges as a condition of continuing to supply that company or individual. This is particularly important where there is a business that can be rescued, with the prospects of rescue being hindered or altogether being removed if the company or individual can effectively be held to ransom. That position has existed for a long time, which has meant that the law is out of date when it comes to other supplies which are essential to the functioning of a business and which have only become prevalent over the past few years—principally supplies of IT products and services.

Such is the importance of IT supplies to most businesses today that insolvency practitioners reported increasing instances where IT suppliers were exercising commercial leverage over insolvent companies and individuals for continued supply, risking a potential rescue of the business to the detriment of creditors as a whole.

By section 92 of the Enterprise and Regulatory Reform Act 2013 (ERRA 2013), which came into force on 25 April 2013, the Secretary of State was given the power to amend by order section 233 of the Insolvency Act 1986 (IA 1986) for corporate insolvency and IA 1986, s 372 for personal insolvency to:

  • add IT suppliers to the list of utility suppliers to which IA 1986, ss 233 and 372 apply. This was in consequence of the increasing importance that IT supplies had to the functioning of businesses since those sections were enacted, and
  • widen the application of IA 1986, ss 233 and 372 to providers of utility services not already covered by those sections. This was thought necessary given the way the utility and telecoms markets had evolved and deregulated since those sections were enacted

The ERRA 2013, ss 93–95 also gave the power to the Secretary of State to make orders rendering void contractual terms in contracts for the supply of essential goods and services that allow the supplier to either terminate the contract or seek to vary its terms where the customer enters into a voluntary arrangement (companies or individuals) or administration (companies).

Summary of the provisions of the I(PES)O 2015 and amendments to legislation

The provisions of the I(PESO) 2015 and the amendments it makes to legislation can be summarised as follows:

  • the scope of IA 1986, ss 233 and 372 is extended beyond statutory undertakers and similar bodies to include private suppliers of gas, electricity, water and communications services. This includes landlords, where such services are supplied by the landlord as part of the tenancy
  • those persons who carry on a business supplying goods or services for the purpose of enabling or facilitating anything to be done by electronic means—essentially IT supplies—are added to IA 1986, ss 233 and 372. The goods and services referred to are:
    • point of sale terminals
    • computer hardware and software
    • information, advice and technical assistance in connection with the use of information technology
    • data storage and processing
    • website hosting
  • new sections 233A (corporate insolvency) and 372A (personal insolvency) are inserted into the IA 1986, which provide that any provision in a supply contract allowing for termination of that contract (either automatically or upon the supplier's election) on the customer's insolvency, or any other insolvency-related term (such as the ability to charge a higher tariff) will cease to have effect. This will, however, only apply in respect of administrations and company voluntary arrangements (CVAs) for companies, and in respect of individual voluntary arrangements (IVAs) for individuals. Therefore, where a company is wound up, or an individual is adjudged bankrupt, the supplier will be able to rely on—and exercise—insolvency-related termination provisions in the supply contract. These provisions will only apply to contracts entered into on or after 1 October 2015
  • even where an insolvency-related term in a supply contract ceases to have effect, new sections 233A and 372A of the IA 1986 provide that the supplier may still terminate the contract where:
    •  the insolvency office-holder consents to the termination
    • the court permits the termination. The court may only do this if it is satisfied that the continuation of the contract would cause the supplier hardship
    • any charges in respect of the supply which are incurred after the company entered into administration or the CVA took effect, or in the case of an individual when the IVA took effect, have not been paid within 28 days of becoming due
    • the supplier has given written notice to the insolvency office-holder that the supply will be terminated unless the insolvency office-holder personally guarantees payment of charges incurred after the company entered into administration or the CVA took effect, or in the case of an individual when the IVA took effect, and the insolvency office-holder does not give the guarantee within 14 days beginning with the day the notice is received by him
  •  the Schedule to the I(PES)O 2015, SI 2015/989 sets out very minor amendments made to other legislation to reflect the changes brought in by the I(PES)O 2015

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.