IT Services are now protected in the event of insolvency – What you need to know

As of 1 October 2015 a new set of laws came into effect that extend the scope of protected services in the event of a company’s insolvency. Historically, upon the insolvency of a company certain key utilities (such as gas and electricity) were protected and it was unlawful for the utility company to terminate their contract with the end user in the event of insolvency. On October 1st the list of protected services was substantially expanded to include IT services.

In short, if you are a provider of any of the following services, you will need to have a look at your standard terms and conditions as it is now unlawful to have a clause in them that allows you to terminate in the event of the insolvency of your customer:

• Point of sale terminals;
• Computer hardware and software;
• Information, advice and technical assistance in connection with the use of Information Technology;
• Data storage and processing; and
• Website hosting.

This means that if your customer becomes insolvent and goes through an insolvency process, then you will be required to continue to provide the above services during that process.

There are some limited exceptions, which include:

• Liquidation – where the customer goes through liquidation, then termination is lawful. This is the only form of insolvency process under which it is lawful to unilaterally terminate the contract;
• Consent – if the insolvency practitioner gives consent, then you may terminate the contract; and
• Unpaid bills – if your bills remain unpaid 28 days after they are due, you can then terminate the contract.

Other than that, it is a case of (a) continuing to provide the services until the customer is no longer insolvent, is wound up or one of the above exceptions occurs; (b) seek a personal guarantee from the insolvency practitioner to cover your bills (which is most unlikely); or (c) get a court order that allows you to terminate the contract (likely to be prohibitively expensive to get). The good news, though, is that if you continue to provide the services then the costs incurred are likely to be considered costs of the administration and will be paid in priority to non-secured debts and claims.

What do you need to do?

If you are a supplier of any of the protected services you will need to undertake a review of your standard terms and conditions, in particular, the termination provisions, to see if they are lawful. If they give you the right to terminate the contract should the customer become insolvent, go into administration or similar, then they will need to be updated to ensure they comply with the recent change in law. The changes are not retrospective, so will not affect existing contracts, but will apply to all new contracts signed after 1 October 2015.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.