On 1 October 2015 the Insolvency (Protection of Essential Supplies) Order 2015 (“PESO”) will come into force. PESO aims to strengthen the statutory protection provided to insolvent companies and insolvency practitioners who need to utilise ‘essential supplies’ to continue to trade.

Essential Supplies

When a business enters an insolvency process they often need continuity of supply of key services in order to preserve value in the business and maintain output to its customers. Some suppliers use their position to hold the insolvent company to ransom by insisting that pre appointment unsecured debts are paid to facilitate on going post appointment supply. Section 233, Insolvency Act 1986 (the “Act”) currently provides an element protection for ‘essential supplies’ by preventing certain categories of suppliers insisting on payment for pre-appointment debts. However, until now the Act limits those categories of protected supplies to “essential supplies” only – namely gas, electricity, water and ‘public electronic communications services’ (i.e. telephone communications).

PESO will expand this list of what constitutes an “essential supply” to include a range of electronic and IT based communications including chip and pin services, computer software and more obvious examples like mobile phone networks, WIFI and broadband supplies. This is a welcome change and reflects the fact that such services are now  perceived as essential for many modern businesses.

In addition, PESO will also broaden the definition of what constitutes a supplier of “essential supplies”. At present essential suppliers are limited statutory undertakers or similar bodies which are under an obligation to provide a service to the public. PESO will broaden the list of essential suppliers to include private suppliers, such as landlords who make onward supplies to tenants.

It should be noted that suppliers can still insist on a personal guarantee from the appointed insolvency practitioner, guaranteeing payment of post appointment supplies, and if the personal guarantee is refused, the supplier can terminate supply, but the widening of the protection will be welcome in any event.

Termination on Event of Insolvency 

At present essential suppliers often include provisions in their terms and conditions for the immediate termination of contracts on the occurrence of a company entering insolvency.  Under the PESO this position will change. For contracts entered into on or after 1 October 2015 a contractual term that provides for the termination of the contract, or for the supplier to do ‘any other thing’ (for example suspending supply or increasing rates disproportionately), on the company entering administration or CVA will be void.

In addition suppliers will not be able to terminate contracts because of ‘an event’ that took place prior to the company entering administration or CVA. The extent of what is included within ‘an event’ is currently unclear and may relate solely to insolvency events or it may cover any event or breach of the contract that occurred prior to the insolvency event, creating considerable scope for disagreement. However the term is interpreted it is clear that the intention is to prevent the supplier relying on a technical pre appointment breach to leverage their position post appointment.

It is not all bad news suppliers. PESO does also include several saving provisions to appease suppliers which confirm that contracts can still be terminated with the consent of the insolvency officeholder and the Court can grant permission for the contract to be terminated if it would cause hardship to the supplier. Most importantly the contract can be terminated where charges incurred after the company entered administration or CVA remain unpaid for 28 days after their due date.

Conclusion

PESO will be a welcome change for insolvency practitioners who often face difficult negotiations with service providers in order to keep a business trading in an insolvency process. The extension to private suppliers is likely to be of particular assistance where no real statutory protection was previously available.