Removal of ‘Continuity of Supply’ Clauses Set to Aid Business Rescue

Companies undergoing a company voluntary arrangement as a form of business rescue are set to benefit from the removal of ‘continuity of supply’ clauses.

There is positive news for businesses undergoing methods of business rescue as the government nears the end of a consultation period to remove ‘continuity of supply’ clauses.

On 9 July 2014, the UK government began a period of consultation to discuss proposed changes to the Insolvency Act 1986, which would see the removal of ‘continuity of supply’ clauses. If implemented, the removal of such clauses will ensure the continued supply of essential services to insolvent companies undergoing a company voluntary arrangement or an alternative business rescue process.

The impact of the proposals

The proposals will force utility companies and other essential providers to continue supplying insolvent companies with the services they need to keep trading. If passed, it is estimated the proposals could save up to 2,000 businesses a year from liquidation.

Currently, contract cancellations and other “ransom” charges are one of the biggest prohibitors to the success of business rescue techniques like company voluntary arrangements. The government are keen to close this loophole which often results in the closure of potentially viable businesses and presents an unnecessary risk to jobs.

A boost to business rescue culture

It is hoped that scrapping the termination clauses which make life so hard for struggling business will provide a valuable boost to the UK’s business rescue culture. Company voluntary arrangements give insolvent businesses the chance to trade their way out of the financial mire. Not only is this approach beneficial for the business and its employees, it can also maximise the level of debt repaid to creditors.

In effect, the proposals will force service providers to continue to supply their goods and services to the insolvency practitioner administering the rescue procedure.

The current provisions

The current provisions contained in section 233 of the Insolvency Act are limited to the supply of gas, electricity, water and communication services. These protections, which are now outdated, allow suppliers to insist on personal guarantees from insolvency office holders as a condition of continued supply.

If passed, the new proposals will increase the scope of the Act to include providers of electronic payment systems, website hosts and IT suppliers (software, hardware and servers). Not only will this prevent suppliers from withdrawing their services due to the commencement of insolvency proceedings, they will also be forbidden from imposing preferential terms.

In our view

There have been occasions in the past when utility companies have banded together and stopped supplies completely from any utility provider unless bills were paid and this cannot be right. This is a significant step forward for the insolvency industry and for those directors wishing to rescue their company when insolvent. Many directors would be prepared to sign personal guarantees in an effort to secure the ongoing utility supplies and hopefully these new rules will make a difference.

Written by: Mike Smith