The Insolvency Service is undertaking a consultation exercise regarding a plan to ensure the continuity of supply of IT services to insolvent companies in a similar manner to the current legislation regarding the supply of essential utilities.
The effect of the proposed order would mean that many IT suppliers may not be able to use their current contractual right to terminate their agreement with the customer or charge extra fees in the event of their customer going into administration or entering into a voluntary arrangement.
The challenge for the IT industry is that unlike the utilities sector, it is made up of a large number of small to medium sized enterprises, particularly in the reseller sector. These businesses face significant cash flows issues and the failure to receive payment (whilst still being expected to provide services and so incur costs) is likely to pose real financial difficulties for them. This will be exacerbated by the limited availability and rising cost of overdrafts for these businesses. Introducing a turnover/profit test may provide some protection for the smaller end of the sector, but may pose a barrier to growth.
The draft order does give the supplier the right to apply to court for permission to terminate the contract if the supplier believes that being required to continue to supply will cause them "undue hardship", but it is unclear what this would constitute.
Alternatively, the supplier may require the administrator to provide a personal guarantee in respect of the payment of the contract charges, failing which the supplier is entitled to terminate the contract.
In our experience many larger businesses (particularly those in the financial services industry) are already alive to the issue of continuity of IT services and have managed to secure contractually the protection they need for critical IT services. These contractual rights typically go beyond the administration/voluntary arrangement limit discussed in this consultation and usually the supplier's right to terminate is limited to non-payment of invoices over a certain threshold value. So in some respects this proposed legislative change reflects the contractual practice of larger businesses with greater commercial leverage.
Responses to the consultation exercise must be submitted by Wednesday 8th October and so remaining time is short to submit a response. Any client wishing to be assisted with the submission of their response should contact Craig Armstrong or Amanda Coale.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.