New protections outlined for supply of IT and energy to insolvent businesses

The draft rules, still to be scrutinised by parliament, will ensure that failing businesses are not cut off from "essential supplies" when insolvency practitioners are trying to find a viable future for them.

Business minister Jo Swinson said the reforms "will help struggling businesses during rescue while providing confidence for the suppliers that they will be paid for the essential services they provide".

Suppliers of gas, electricity, water or communications services, computer hardware and software, website hosting, data storage and processing, IT technical assistance and services enabling the making of payments will be affected by the new rules, which are expected to have effect from October.

The draft Insolvency (Protection of Essential Supplies) Order 2015 would prevent suppliers of those utilities and services in certain circumstances from enforcing contract clauses that would otherwise allow them to terminate those contracts. The proposals, if enacted, would give effect to provisions contained in the 2013 Enterprise and Regulatory Reform Act.

Termination of contracts could only happen if the insolvency practitioner running a failing business agrees, if a court sanctions the termination of the contracts or if the failing business fails to pay charges for services supplied after the insolvency event occurred within 28 days of the due date for payment. Courts would only be able to permit the termination of contracts for 'essential supplies' if continuation of the contract would cause the supplier "undue hardship".

Suppliers would have similar restrictions placed on the termination of their supply, but would be able to seek a personal guarantee from the incumbent insolvency practitioner at the failing business that payment for the supply of services in future will be met. If the insolvency practitioner does not give that guarantee within a fortnight, suppliers would be entitled to terminate their supply of services.

Insolvency law expert Nick Pike of Pinsent Masons, the law firm behind Out-Law.com, said: "This reform builds on stipulations in current insolvency legislation regarding the maintenance of supply by utility companies to customers who have gone into an insolvency process. With companies’ increasing reliance on IT, it is frequently impossible for them to remain in business without a fully operative system."

"The new rules will make it far easier for insolvency practitioners to continue to trade a business whilst seeking purchasers for it as a going concern, since they will not have to worry about unreasonable demands made of them by suppliers. That is bound to make the task of rescuing a business easier," he said.

The plans were welcomed by R3, the Association of Business Recovery Professionals.

"These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible," Giles Frampton, R3 president, said. "Changes to the terms of supply for insolvent businesses place unnecessary hurdles in the way of business rescue. Without reliable and affordable IT and energy supply, attempts to save a business can be stymied quickly."

"Over time, we would like to see more types of suppliers added to the list of those prevented from trying to steal a march on other creditors and take advantage of their importance to struggling businesses," Frampton said.