Prevention better than cure?

Prevention better than cure?

Published:

Author: Craig Armstrong & Amanda Coale

Earlier this month the Insolvency Service issued an updated draft statutory order regarding the provision of essential IT supplies which is planned to come into force on 1 October 2015.

In October of last year we highlighted the consultation exercise being undertaken by the Insolvency Service 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 services.

Interestingly, of the 31 consultation responses received by the Insolvency Service, just 2 were submitted by IT providers. Instead the majority of the respondents were energy suppliers, merchant acquirers and insolvency practitioners.

Perhaps the respondents with the most to lose are the merchant acquirers - merchant acquiring arrangements involve potentially massive contingent liabilities if the merchant fails to provide the goods or services which are purchased by the customer using a credit card. One merchant acquirer's response used as an example one of its unnamed merchants and explained that its contingent liability in respect of chargebacks alone would be £196 million in the 14 day period allowed for the insolvency practitioner to respond to a request for a personal guarantee (and it would be a brave insolvency practitioner who would be willing to give such a guarantee!).

Understandably the position of the merchant acquirers was that to apply the new rules to them would mean they would have to either terminate their merchant acquiring relationships more readily if the early stages of financial distress are identified, improve the security granted by the merchant and/or increase their service charges in respect of those market sectors where the risks of insolvency or chargebacks are the greatest (typically being the gambling and travel sectors).

Against this united front of merchant acquirers, the Insolvency Service has backed down and deleted the reference to 'any service enabling the making of payments' from the draft order.

So what of the IT supplier community? Only Virgin Media and a comparatively small software development company based in Oldham, Web Applications UK, chose to respond to the consultation exercise. Is this simply ignorance of the consultation exercise or plain apathy? We suspect not.

We believe there are two key factors which give IT suppliers some comfort:

  • Firstly, just as the merchant acquirers forewarned in their consultation responses, the supplier could protect itself contractually by improving the security arrangements (such as a parent company guarantee), strengthening termination triggers to apply at the very early stages of financial distress or adjusting the payment profile for the services so that the supplier's cashflow risk is minimised. However, suppliers should note that these measures should not be activated by the customer's administration or voluntary arrangement (as then such provisions are rendered unenforceable); and
  • Second (and as highlighted in our previous briefing), for large scale outsourcings the supplier's termination rights are usually limited to persistent non-payment, without any insolvency-related termination triggers, and in such situations the supplier is no worse off as a result of the changes implemented by the Order.

However, our advice to IT suppliers remains to revisit their standard terms of service and to consider which of the preventative contractual measures should be implemented. Perhaps more importantly, suppliers should revisit their business processes to ensure that their operations and accounts receivable personnel are acutely aware of the importance of identifying the early signs of financial distress so as to be able to seek a personal guarantee as soon as an insolvency practitioner is appointed and so minimise the supplier's risk exposure.

As is often said, prevention is better than cure.

Disclaimer

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.