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Insolvent companies now have the right to force IT suppliers to continue providing services, after new legislation that came into effect on 1 October 2015.
The supply of IT services has been put on an equal footing with energy and telecoms utilities in that supplies can no longer be cut off when a client firm has financial difficulties.
The change is found in the Insolvency (Protection of Essential Supplies) Order 2015 that amends part of the Insolvency Act 1986. IT suppliers, including services such as data storage, processing and website hosting, and their customers have new obligations and rights of protection. Previously, an IT supplier could stop providing a service if they felt an insolvent customer would not be able to pay their bills.
The revised section 233 extends the list of essential services to include private suppliers of utilities – these being gas, electricity, water and telecoms - and adds IT supplies, specifically “for the purpose of enabling or facilitating anything to be done by electronic means”.
Rita Lowe, a partner at law firm CMS, said the change was due.
“Since the opening up of the utilities market three decades ago, the nature of utility supplies has changed. Private suppliers have come into the market and were often not caught by section 233 of the Insolvency Act 1986, which protects companies against suppliers of essential utilities terminating those supplies on insolvency,” she said.
“The way in which companies operate has also changed. IT supplies are hugely important for the continuation of many businesses in a way that was simply not the case when the original legislation came into force.
“This means these suppliers will be unable to terminate supplies or demand existing pre-insolvency debts are paid as a condition of continuing supplies.”
However, suppliers are also offered new safeguards in dealing with companies entering administration.
“First off, supplies can be terminated with the office holder’s consent, such as the administrator, liquidator or administrative receiver. Second, the supplier can request a personal guarantee from the office holder that they will pay post-insolvency charges as a condition of continuing supplies,” said Lowe.
“If the office holder does not provide the guarantee in 14 days, the supplier may terminate. Where post-administration costs are not paid in 28 days of falling due, suppliers may also terminate. Last, and as a final resort, the supplier has the fourth option of applying to court on the ground that continuing to supply is causing them hardship.”
Lowe said IT suppliers should always check new customers are in a position to keep paying for services.
“When taking on new accounts, suppliers should undertake financial checks to ensure they are not providing supplies at an unduly discounted rate that they will be held to in the event the company goes into administration or a voluntary arrangement,” she said.