DPRR/12-13/88
Enterprise and Regulatory Reform Bill
Addendum to the Delegated Powers Memorandum by the
Department for Business, Innovation and Skills for the
Delegated Powers and Regulatory Reform Committee
Introduction
This Addendum to the Delegated Powers memoranda previously submitted to the
Delegated Powers and Regulatory Reform Committee deals with new or amended
powers in the Enterprise and Regulatory Reform Bill following Government
amendments which have been tabled to the Bill at Report stage in the House of Lords.
In respect of the power sought the memorandum sets out:
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The context and purpose of the power;
The Government’s justification for seeking the power;
The extent to which the power is novel, or draws on precedents;
The justification for the procedure proposed for the power sought.
The Department for Business, Innovation and Skills has considered the use of this
additional power in the Bill as set out below and is satisfied that it is necessary and
justified.
Part 6 – Miscellaneous and General
Insolvency termination clauses
Power 1
New clause providing a power to add to supplies protected under the Insolvency
Act 1986
Power conferred on: Secretary of State
Power exercised by: Order
Parliamentary procedure: Affirmative Resolution
Context and purpose
This clause gives the Secretary of State a power to make an Order amending sections
233 and 372 of the Insolvency Act 1986. These sections currently allow for certain
providers of gas, electricity, water and communications services (“utility supplies”) to
seek a personal guarantee from an insolvency practitioner before continuing to supply
an insolvent business and to prevent such suppliers from demanding that preinsolvency arrears are cleared as a condition of continuing supply.
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The new power enables IT supplies to be added to the present list of utility supplies to
which sections 233 and 372 apply. This reflects the increasing importance of IT
supplies to the functioning of modern businesses since the Insolvency Act 1986 was
drafted.
The power also enables the Secretary of State to widen the application of these
provisions to providers of utility services who are not presently covered by sections
233 and 372, but does not add further to the list of utility supplies. In the opinion of
the Government, this is necessary in order to be able to reflect the way the utility and
telecoms markets have evolved and deregulated since these statutory provisions were
enacted.
Justification
This power is drafted narrowly to restrict the Secretary of State to adding to sections
233 and 372 those supplies of goods and services that enable or facilitate the doing of
anything by electronic means, i.e. IT services, and only those suppliers of the utility
supplies already listed in sections 233 and 372.
The Government is not yet in a position to specify which IT and utility supplies
providers might be added as it will consult with interested parties to determine which
specified description of providers of supplies should be included. This is why a
power, rather than direct amendment is considered appropriate. It is also desirable to
be able to define such suppliers by Order so as to retain the flexibility to update
definitions in light of changing market practices in the delivery of IT and utility
supplies.
The policy intention behind sections 233 and 372 is to afford some protection to postinsolvency supplies that may be essential to an insolvency office-holder, by
preventing essential suppliers from seeking ‘ransom’ payments as a condition of
continuing to supply in insolvency situations.
Historically, only utility providers were deemed essential and when enacted these
provisions would have applied to all utility providers. However the Government
considers that these provisions may now need to be extended to supplies of certain IT
goods and services, and also to any providers of utility supplies who fall outside of the
current provision.
Any changes made using this power would be designed to support business rescue.
Suppliers demanding payment of pre-insolvency debts for continued supply can
hinder the likelihood of a business rescue, reduce potential realisations and may result
in the supplier receiving preferential payments at the expense of other creditors.
Precedent
We have not identified a specific precedent for the powers in this clause.
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Procedure Justification
In view of the implications that the exercise of this power will have upon entities who
supply in the IT and utilities sectors that are added to the existing lists in sections 233
and 372 and because the power is to amend primary legislation, we consider the
affirmative resolution procedure is appropriate for this power.
Power 2
New clause: Corporate insolvency: power to give further protection to essential
supplies
Power conferred on: Secretary of State
Power exercised by: Order
Parliamentary procedure: Affirmative Resolution
Context and purpose
This clause gives the Secretary of State a power to make an order to prevent providers
of IT and utility supplies from altering the terms of or withdrawing the supply from
an insolvent company on account of the insolvency or of a termination event that
occurred before insolvency that has not been relied on by the time of insolvency, by
rendering void certain contractual terms (subject to a number of safeguards for
suppliers).
Many contracts for supply include terms that allow suppliers to terminate or alter the
terms of a supply upon the insolvency of a customer, even if the business is
continuing, for example during administration. Such clauses allow the supplier to
withdraw supplies in the event of a customer entering a formal insolvency procedure,
or to change the basis on which the supply is given. This can prevent insolvency
practitioners trading a business on whilst they look to effect a sale as a going concern,
resulting in fewer business rescues, more liquidations and job losses.
The Government considers that preventing providers of IT and utility supplies from
withdrawing or altering the terms of their supply to an insolvent business following
the insolvency will support the rescue of insolvent businesses or, if rescue is not
possible, deliver better outcomes for creditors as a whole in the insolvency.
Justification
This power enables the Secretary of State to make an order that would render void
contractual terms that allow utility and IT supplies to terminate or be provided on
altered terms where a company has entered administration or a voluntary arrangement
under Part 1 of the Insolvency Act 1986 takes effect, except where the administrator,
supervisor of the voluntary arrangement or the court has given consent.
The power is limited to only those insolvency procedures where there is likely to be a
possibility of a business rescue, or a better outcome for creditors than would be likely
in a liquidation, i.e. administration and company voluntary arrangements.
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The power contains a number of express safeguards that must be included in an order
made under this power, and gives the Secretary of State the power to include more
safeguards as necessary, in order to protect suppliers who may be affected. Those
safeguards include granting the right to a supplier to terminate a contract of supply
where any charges for post-insolvency supply remain unpaid after 28 days beginning
with the day on which payment is due regardless of the terms of the contract. A
supplier may also terminate supply through its contractual terms on account of the
insolvency if given permission by the insolvency office-holder or by the court. The
power does not affect the right to terminate or alter a contract in the ordinary course
of business.
The power limits the type of contracts that may be covered by such an order to those
that provide supplies listed in sections 233(3) of the Insolvency Act 1986, as these are
most likely the type of supply that are essential to the running of the company.
Under section 233 the relevant provider will be able to request a personal guarantee
for payment from the insolvency office-holder if the office-holder requests the
continuance of the supply as a condition of supply. However the power also requires
an order include the right for a supplier to terminate supply if no personal guarantee is
forthcoming and a termination clause has ceased to have effect under such order,
although exceptions may be made to this right.
The power is restricted so that it may not be exercised retrospectively in a way which
would affect contracts of supply which pre-date the introduction of the regulations.
The Government will consult with interested parties before exercising the power to
ensure that it fully understands the economic impacts on essential IT and utility
suppliers who might be affected and can address these in any regulations made.
Precedent
We have not identified a specific precedent for the powers in this clause.
Procedure Justification
The affirmative resolution procedure is considered appropriate for this power because
the Government considers that the potential impact on commercial freedoms and
contractual relationships entered into before a company enters formal insolvency
should be subject to a higher level of scrutiny than that which would apply under the
negative resolution procedure.
In the new clause providing supplemental provisions, entitled “Sections (Corporate
insolvency: power to give further protection to essential supplies) and (Individual
insolvency: power to give further protection to essential supplies): supplemental”, the
Secretary of State is given power to make different provision for different cases. This
is considered desirable to ensure that any order made can address any particular
concerns that are discovered during consultation and which may require particular
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provision. There is also a power to make consequential and transitional arrangements,
essential for the proper functioning of any order made.
Power 3
New clause: Individual insolvency: power to give further protection to essential
supplies
Power conferred on: Secretary of State
Power exercised by: Order
Parliamentary procedure: Affirmative Resolution
Context and purpose
This clause gives the Secretary of State a power analogous to that in the new clause
entitled “Corporate insolvency: power to give further protection to essential supplies”,
above, to make an order to prevent providers of IT and utility supplies from
withdrawing of altering the terms of the supply from an individual subject to an
individual voluntary arrangement on account of the insolvency or of a termination
event that occurred before insolvency that has not been relied on by the time of
insolvency, by rendering void certain contractual terms (subject to a number of
safeguards for suppliers).
Justification
This power enables the Secretary of State to make an order that would render void
contractual terms that allow utility and IT supplies to terminate or to alter the terms of
the supply where an individual voluntary arrangement under the Insolvency Act 1986
has been approved, except where the supervisor of the voluntary arrangement or the
court has given consent.
The justification for the power is analogous to that identified above for corporate
insolvency procedures, and is specifically restricted in this instance to supplies made
to individuals subject to an individual voluntary arrangement for the purpose of
carrying on a business.
The power contains the same express safeguards for suppliers as identified above for
corporate insolvency.
The Government will consult with interested parties before exercising the power to
ensure that it fully understands the economic impacts on essential IT and utility
suppliers who might be affected and can address these in any regulations made.
Precedent
We have not identified a specific precedent for the powers in this clause.
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Procedure Justification
The affirmative resolution procedure is considered appropriate for this power because
the Government considers that the potential impact on commercial freedoms and
contractual relationships entered into before an individual enters into an individual
voluntary arrangement should be subject to a higher level of scrutiny than that which
would apply under the negative resolution procedure.
The power contains through the new clause providing supplemental provisions,
(“Sections (Corporate insolvency: power to give further protection to essential
supplies) and (Individual insolvency: power to give further protection to essential
supplies): supplemental”), the ability to make different provision for different cases,
consequential and transitional provisions and deal with other similar matters. This is
for the same reason as identified for corporate insolvency.
Department for Business, Innovation and Skills
25 February 2013
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