Just two tech firms responded to a government consultation on a potentially “catastrophic” change in the law that will force suppliers to keep kit and services flowing to biz customers that are in administration.
Under proposals laid out by Business Minister Jo Swinson, providers of “essential IT” will be “prevented” from turning off the taps while an insolvency practitioner (IP) pursues ways to rescue a business.
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“Rescuing struggling but viable businesses out of insolvency helps save jobs and improves the likelihood of payment to those owned money,” said the Lib Dem MP for East Dunbartonshire.
“Continued IT and energy supplies are needed for businesses to continue trading while options are sought about their future,” she added.
The government’s plan would allow suppliers to seek a personal guarantee for debts from the IP designed to give them “certainty” that IT goods and services will be paid for. Current insolvency law only allows for this with a limited number of utility suppliers.
Tech firms will retain the right to terminate contracts with insolvent customers if payment for supply is not received within 28 days, the proposals state.
The supplier can also apply to the court to scrap the contract on the grounds of hardship, and guidance will be issued to IPs to contact suppliers following their appointment to forecast their needs.
IT businesses were asked last autumn to voice an opinion about the changes but only two, Virgin Media and Web Applications UK, came forward alongside 29 energy suppliers. Clearly Brit tech suppliers could learn a thing or two about lobbying from the energy sector.
Government took the lack of volume from the tech industry as an endorsement for the proposed legislation, but even the two that responded had misgivings.
Virgin head of legal Andrew Kitchen said no exceptions should be provided from the ability to seek a personal guarantee from the IP “as a condition of continuing supply”.
Craig Kennedy, finance director at Oldham-based software developer Web Applications UK, said the legislation needs to “consider that SMEs may not necessarily have the cash reserves or working capital to support the continued provision of services in the absence of payment.”
“There is a risk that a domino effect may occur with the SME supplier entering into financial difficulty themselves,” said Kennedy. “At present, the legislation impacts mainly on large multinational corporations, the changes are likely to be far reaching, including owner-managed businesses and SMEs”.
Insolvency trade body R3 worked on the plans with government, so is unsurprisingly upbeat about the expected impact.
“These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible,” said president Giles Frampton.
He said changes in supply to insolvent businesses “place unnecessary hurdles in the way of business rescue. Without reliable and affordable IT and energy supply, attempts to save a business can be stymied quickly.”
A business rescue can be jeopardised by unscrupulous suppliers that change Ts&Cs or up prices to customers in administration but the flip side to that could see tech businesses stung badly.
Energy suppliers tend to be sprawling organisations but tech suppliers are generally smaller businesses often with their livelihood tied to a customer, said Vernon Dennis, head of restructuring and reconstruction at London law firm Howard Kennedy LLP.
“For individual suppliers this [proposal] could be catastrophic if they find themselves locked into servicing a customer that doesn’t know where it is going,” he told The Channel.
R3 past research shows administration leads to the rescue of a tiny fraction of insolvent firms, the vast majority of businesses will be sold.
Dennis said that in a change of ownership, the new parent of the business does not carry the contingent liabilities of the previous owner.
Eddie Pacey, boss at consultancy EP Credit Management - a veteran of credit in tech distribution - also warned IT suppliers are classified as non-secured and so way down on the list when debts are settled.
He told us the government proposals were destined to fail unless a supplier can actually receive a guarantee of payment for goods and services, otherwise “Where is the incentive for continued provision?”
Of course, the changes are not set in stone yet and will be subject to the sleepy eyes glare of Parliament before coming into force later this year in October. ®