"Essential suppliers" to be prevented from terminating contracts with insolvent companies

Out-Law News | 10 Jul 2014 | 2:44 pm | 2 min. read

IT and utility companies that provide "essential" supplies would be prevented from enforcing termination clauses in contracts with companies that fall into financial difficulties under plans put forward for consultation by the UK government.

The proposals, which would give effect to provisions contained in the 2013 Enterprise and Regulatory Reform Act, would "aid business recovery" and prevent these suppliers from seeking an unfair advantage over other creditors, said Jo Swinson, the business minister. Suppliers would also be required to continue providing their services during the business recovery, according to the consultation.

"These proposals are good news for employees of insolvent businesses, creditors and insolvency practitioners who are trying to rescue ailing companies," said Swinson. "Businesses are currently closing down because insolvency practitioners are unable to secure the essential supplies they need to deliver the best outcome for creditors and employees."

"The measure also demonstrates the government's commitment to doing all we can to save jobs and build a stronger economy. I look forward to hearing the views of all interested parties to ensure that the right balance is struck when implementing these changes," she said.

The consultation, which closes on 8 October, includes a number of safeguards to ensure that those suppliers that are required to continue supplying insolvent businesses are adequately protected. These include the ability to request a personal guarantee from the insolvency practitioner (IP) leading the insolvency process in respect of any post-insolvency supply, and the right to terminate supplies if post-insolvency supplies remain unpaid for more than 28 days or with the permission of the court or IP.

Insolvency law currently allows a limited list of utilities suppliers that may seek a personal guarantee from an IP before continuing to supply an insolvency company, but that may not demand payment of pre-insolvency debt as a condition of further supply. The change as proposed would extend these provisions to cover IT suppliers as well as private sector 'on-sellers' of utilities including gas, electricity, water and telecommunications that are not presently covered by the regime.

The consultation proposes the creation of secondary legislation which would void any contractual terms that allow essential suppliers to withdraw supplies to an insolvent company, defined as one which has either entered administration or had a voluntary arrangement under the 1986 Insolvency Act approved. Suppliers would also be prevented from making other changes to supply terms as a result of the insolvency procedure, including increasing charges.

Insolvency trade body R3 had lobbied for the changes. Its president, Giles Frampton, described termination clauses which take effect on insolvency as "one of the biggest obstacles to business rescue that IPs come across".

"Our members estimate that banning termination clauses in supply contracts could help save over 2,000 businesses a year," he said. "R3 campaigned long and hard for action to be taken on termination clauses, winning support from the business and creditor communities. We are very pleased that an end to the use of termination clauses by crucial suppliers is one step closer."

"Business rescue is in the interests of both creditors and insolvent businesses and their employees. Turning a business around can be a much better outcome than that business being liquidated. Scrapping termination clauses will give many struggling businesses a better chance of survival and should boost the UK's business rescue culture," he said.