A legislative fight back to keep the lights on at insolvent businesses

The Association of Business Recovery Professionals (R3), on whose Southern Region Committee I sit as Vice-Chairman, has for many years been campaigning for greater protection for insolvent entities entering a rescue procedure to ensure they do not forfeit the supply of crucial goods or services, or have to renegotiate them on onerous terms. The rationale for reform is that in order to rescue the core, profitable businesses within the insolvent entities, it is essential that those who supply key services are not able to hold those tasked with the rescue to ransom, at the expense of other creditors.

On 27 February 2013, the government published proposed amendments to the Enterprise and Regulatory Reform Bill 2012-2013 (Reform Bill) which would give them power to introduce legislation to do just that, at least in the case of company administrations and voluntary arrangements (corporate and, in some cases, personal).

The power would permit amendment to the Insolvency Act 1986 (specifically sections 233 and 372) which could widen the description of the type of bodies supplying protected supplies to include private firms which do not otherwise come within the scope of the existing statutory definitions. Protected supplies could also be extended to include goods or services supplied for the purpose of enabling or facilitating anything to be done by electronic means, e.g. essential IT supplies.

Broader protections would also mean that certain termination-related provisions in a contract for the supply of essential goods or services would be ineffective if a company enters administration or a voluntary arrangement (CVA) (or an individual in business for themselves enters a voluntary arrangement (IVA)), for example if it would terminate the contract or entitle the supplier to terminate the contract because the company entered into administration or CVA (or because of an event preceding administration or a CVA), or if an individual in business entered an IVA.

Such termination provisions would be effective if the relevant insolvency office-holder consented to the termination, a relevant court granted permission, or if any supply charges incurred after the relevant administration or VA began remained unpaid after 28 days beginning with the day on which such payment was due.

The right of the supplier to terminate absent a personal guarantee from the office-holder is likely to be preserved under these reforms, but probably with new exceptions.

This is widely regarded as good news for business rescue as it will widen the options available to the insolvency practitioner advising / appointed, and is therefore good also for the continued flow of value within the economy generally. No doubt suppliers which may be caught by the new provisions, some for the first time, will wish to ensure that they are not overexposed from time to time given that they will more likely have to “keep the lights on” for longer and/or will not be able to hold the entity or its office-holder over such a barrel as they perhaps can at present, but in due course more detail on the safeguards to protect suppliers will be published.