Understanding Continuation of Supply for Insolvent Businesses and What This Means for Creditors

The problem of utility companies and other suppliers withdrawing their services to insolvent businesses has caused untold damage to creditor interests for some time. Vital business software services such as IT and accounting, in addition to energy and water supplies, are being deliberately withdrawn by providers intent on making a profit from misfortune.

The result is damaging not only to the individual businesses, but the economy as a whole, and creditors in particular. Alongside the government, the trade body for insolvency professionals, R3, would like to ensure that insolvent companies can rely on the availability of vital services via forced continuation of supply.

A little background to the situation

The essential supplies named in Section 233 of the Insolvency Act, 1986, are gas, electricity, water, and communications services. But because we have entered a new age of communications since 1986, the original legislation does not reflect today’s advanced digital and telecoms systems so heavily relied upon by business.

Additionally, the current legislation incorporates only the ‘original’ utility or communications suppliers, rather than addressing the fact that companies now sell on these types of service.

In some cases corporate tenants pay their landlords directly for gas and electricity - if a landlord chooses to withdraw the supply due to rent arrears, there is clearly little hope of the business continuing to trade.

Accounting and management software is also integral to business operations, and the inability to access or update vital information compromises the company’s chances of survival. It offers them little alternative but to pay large sums simply to carry on trading.

Businesses effectively ‘held to ransom’

Those firms that do not immediately cut vital supplies often decide to place an insolvent company on a higher tariff, which can make an already dire financial position seem untenable. It can, in fact, be the tipping point that forces the company to close down.

Other suppliers demand a ‘ransom payment’ before they will continue their contractual arrangements, and whether the supply is communication or utility-based, this can have a devastatingly negative effect on the level of returns for creditors.

The money spent on appeasing these providers is lost to the creditors, and can make the difference between unsecured creditors receiving a reasonable dividend, or nothing at all.

Not only energy and water suppliers

It is not only the utility services that are affected. Vital access to accounting and other management software, as well as services that support a company’s website, are all vital to business survival and may be withdrawn at a moment’s notice under the legislation as it currently stands.

Furthermore, if there was a possibility that the company could be sold on as a ‘going concern,’ it is unlikely that prospective purchasers would be happy to complete a deal under such fragile circumstances.

So what changes need to be made to resolve this situation?

In order to combat the actions of these suppliers and pave the way to greater returns for creditors, various amendments and expansions to the current legislation have been recommended, including:

• Making the term ‘essential services’ within Section 233 of the Insolvency Act, inclusive of not only gas, electricity, water, and some communications, but also IT-based supplies such as software – accounting and management information, for example.
• Ensuring the legislation denies essential service providers the freedom to demand large ‘ransom’ payments from insolvent companies.
• Dealing with the flaw that allows on-sellers to withdraw their services or charge high fees.
• Extending the requirement to retain the existing terms of business under an original contractual arrangement with a supplier – they are then forced to continue their supply as long as the insolvent company pays its bills in full and on time.

A more promising outlook for insolvent companies and their creditors

If these legislative changes come into effect, it could make a significant difference to the number of insolvent companies being forced to close down. Creditors would benefit from higher dividends, as restrictions on supplier behaviour came into force.

It has been suggested that by forcing essential suppliers to continue providing their services on the same terms post-insolvency, would put their own companies at risk. Forced continuation of supply would not endanger them, however, as the terms would only apply if invoices were paid on time and in full.

Additionally, as essential suppliers they would be paid as an expense of the administration, and would therefore have precedence over other payments so would not lose out financially.

Begbies Traynor can help at any stage of business development. If you believe your company is about to enter insolvency, you need to act quickly to avoid allegations of wrongful trading. Call one of our experts to find out more about your options.