IT Suppliers & Insolvent Customers: When you can't just turn off the switch
The current economic outlook suggests that growth will slow and the UK may enter technical recession. Couple this with businesses preserving cash flow in case of a no deal Brexit and the likelihood of businesses going bust increases.
If you’re supplying IT services to a customer who goes bust, you can just turn off the supply – right? Not always! When a business goes into an insolvency process suppliers who are essential to its business may not be able to stop their services even if they have contractual rights to do so. The Insolvency Act 1986 protects essential supplies during insolvency processes by (a) obliging the supplier to continue supply provided various conditions are met and (b) in certain cases restricting a supplier’s rights to exercise insolvency-related contractual termination for those essential supplies regardless of what the supply contract says.
Essential supplies include gas, electricity, water and communications services; goods and services for the purpose of enabling anything done by electronic means – including point of sale terminals, computer hardware and software, IT support services, data storage and processing, and website hosting. This means that essential suppliers (incl. IT suppliers) cannot always just switch off their supply when the customer goes into insolvency; automatically terminate their supply contract; withhold services; alter the terms of supply; or make it a condition that outstanding payments are made for prior arrears.
Where the essential supplier provisions apply they can only switch off if:
- they ask for a personal guarantee from the administrator / VA supervisor guaranteeing payment of their charges for the continuing supply and that guarantee is not given within 14 days. You can only
- ask them to guarantee post insolvency supplies (not any earlier arrears);
- has consent from the administrator / VA supervisor or the court; or
- you’re not paid for supplies made after the commencement of the administration / VA within 28 days of their due date.
So how can you mitigate the effects of this, if caught? You can limit your risk by:
- reviewing / revising termination clauses in your supply contracts to allow the right to terminate at the earliest threat of failure - and prior to formal insolvency starting. Coupled with monitoring unpaid invoices, and the financial position of your customers, and having mechanisms in place to identify defaults early so you can exercise termination rights early;
- distinguishing between essential and non-essential supplies and services in your supply contract; and
- where a customer does go bust, engage with the office holder at an early stage to establish which supplies are essential and need to continue, and to seek personal guarantees for future charges in
- respect of them; and take advice to understand the insolvency process to avoid nasty surprises.
If you need any help understanding your position if a customer goes bust, or you want to take early action to safeguard your position, please contact Frank Bouette or Ruvimbo Kandi, or you can give us a call on 0345 070 6000.
To find out more about what what our Restructuring and Insolvency team can offer, please click here.