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Private sector suppliers of "essential" IT services and utilities must continue to support insolvent businesses, says Government

IT companies and other "essential" service providers will be legally obliged to continue to supply insolvent firms under plans to encourage the rescue of viable businesses, the Government has announced.27 Feb 2013

An amendment to the Enterprise and Regulatory Reform Bill, which is currently before Parliament, will require suppliers in the IT and utilities sector to continue to supply goods and services to an insolvency practitioner (IP) trying to rescue a struggling business. They will be obliged to do so unless specifically released by the IP or the court. Safeguards will be provided to ensure that those suppliers will be protected if the business fails, the Government said.

Further changes will prevent those suppliers from increasing charges or demanding the payment of debts outside of the insolvency process as a condition of continued supply. The Government will consult on the impact of the proposals before implementing the new powers, it said.

"This is good news for employees of insolvent businesses, creditors and insolvency practitioners who are trying to rescue ailing companies," said consumer affairs minister Jo Swinson. "Businesses are currently closing down because restructuring professionals are unable to secure the essential supplies they need to continue trading whilst they restructure or seek a buyer. The measure will ensure they can secure the supplies they need to deliver the best outcome for creditors and employees."

The proposals were welcomed by insolvency trade body R3, which had lobbied for the changes, and by restructuring expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com.

"This is a small step which could make a significant different in rescuing businesses being held to ransom by utilities and IT suppliers," Lomax said. "It may also be a litmus test of support for a much wider moratorium on the withdrawal of support by key suppliers and others along the lines of that applicable under Chapter 11 bankruptcy procedure in the US – something that R3 has previously advocated under its 'rescue for ransom' reform initiative."

"There is already some provision for this in insolvency legislation but, following the privatisation of public utilities, it has become outmoded and largely ineffective," he said.

The Government has proposed adding IT suppliers and private utility providers to the list of those who can ask an IP for a personal guarantee before continuing to supply an insolvent company. Companies on the list are not allowed to demand payment of pre-insolvency debt as a condition of further supply. The list currently covers utilities such as gas, electricity, water and telecommunications, but does not yet include so-called 'on-sellers' of utilities. Suppliers will be able to cut off post-insolvency supplies if bills remain unpaid for more than 28 days or with the permission of the court or IP.

The amendment will give the power to introduce secondary legislation, following sufficient consultation, which will void any contractual terms that allow an essential IT or utility provider to withdraw supplies to a company that had entered administration. Suppliers would also be prevented from making other changes to supply terms as a result of the insolvency procedure, including increasing charges. The protections would also cover firms which are subject to an approved company voluntary arrangement , as well as those that have gone into administration.

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Expertise in Business Restructuring

Pinsent Masons' Restructuring team helps a wide range of clients who are working with businesses in financial difficulty to rescue those businesses, improve recoveries and save jobs. We do this by working with all parties to identify opportunities and risks and to deliver innovative strategies to achieve our clients’ goals. Our clients trust us to work on many of the UK's most high profile restructuring assignments. We also draw upon a wealth of expertise and market contacts which we use to introduce new business opportunities to clients.

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