The Government launched a consultation* this week on their proposals to force more crucial suppliers to continue to supply their services during formal insolvencies, irrespective of any pre-existing debts.
The proposals would expand the scope of the current regime**, which secures gas, water, electricity and communications services from certain suppliers to include more suppliers and extra services. The current law dates from the 1980s. The rules prevent affected suppliers from either withdrawing their supplies or demanding ransom payments because of a customer’s insolvency. The justification for this erosion of a supplier’s freedom to contract on agreed terms is to avoid:
- greater pressure on an insolvent business’s finances at a critical time “damaging the chances of survival by preventing funds being used to facilitate a rescue“; or
- certain creditors receiving preferential treatment at the expense of others “obviating the basic insolvency principle of all creditors in the same class being treated equally“
The problem here is the current legislation does not catch intermediate suppliers – the law hasn’t kept up with how the market has evolved or deregulated. If a company contracts direct with an energy supplier for its electricity; the current rules apply to this supply. If that same company contracted with its landlord to supply that electricity (as an intermediary); the current rules would not affect the supply. The Government intends to include ‘on-sellers’ in the regime with the new proposals. There is no statutory definition of on-sellers – but the aim is the law should include any supplier of utility or telecoms services that carries on a business of giving those supplies.
Similarly, in the 1980s, IT services were not considered to be a critical supply for most businesses. Obviously that has changed – now, a supplier who threatened to withdraw IT services could bring most businesses to their knees. The proposals would allow the Government to add to the current list any “supplies which enable or facilitate anything to be done by electronic means (IT goods or services)“.
Protection for suppliers
The law stops suppliers from terminating contracts based on unpaid bills pre-insolvency, but the law isn’t one-sided though. Suppliers can still withdraw supply if they are not paid or insist on a personal guarantee from the insolvency practitioner for any unpaid bills.
If the proposals come into force, the powers will not affect contracts of supply already in force.
The consultation asks for comments by 8 October 2014. R3 has welcomed the proposals – citing termination clauses that take effect on insolvency as “one of the biggest obstacles insolvency practitioners come across.”
What are your thoughts?
**ss 233 and 372 Insolvency Act 1986