How energy suppliers can protect themselves from insolvent customers

How energy suppliers can protect themselves from insolvent customers

For a number of years, following a customer entering into a formal insolvency process, suppliers of electricity and gas have been able to make it a condition of the giving of the supply that the office-holder personally guarantees the payment of any charges in respect of the supply (section 233 Insolvency Act 1986).

However, any guarantee can only relate to supplies made after the date of the insolvency event - they cannot be used to obtain payment of supplies made pre-appointment.

It is also important for suppliers to note the use of the phrase “any charges in respect of the supply”, as this provision can be very widely interpreted and does not appear to be limited to just the cost of consumption.

Protection to the essential supplies of insolvent businesses

A further provision was inserted by The Insolvency (Protection of Essential Services) Order 2015 to give further protection to the essential supplies of insolvent businesses. This meant that upon either entering into administration, or a voluntary arrangement being approved, certain “insolvency-related terms” in contracts cease to have effect, so preventing a supplier from terminating a supply, terminating a contract, altering the terms of a contract or compelling higher payments for supply. (section 233A of the Insolvency Act 1986).

The definition of an ‘insolvency-related term’ is also widely drafted and so this provision is not limited to a term that results in termination. The Act also includes a term that states that “any other thing would take place because the company enters into administration or the voluntary arrangement takes effect”.

Do I have to keep supplying energy to insolvent business?

There are exceptions to this rule that enable a supplier to terminate a contract:

• Where the office-holder gives consent;
• The court gives permission; or
• Where the charges in respect of the supply made after the insolvency event remain unpaid after 28 days.

It is also possible for a supplier to terminate the supply if a personal guarantee is requested for the office-holder, and one is not provided after 14 days. However, experience shows that terminating a supply is not always a straightforward process.

Corporate Insolvency and Governance Bill

The new Corporate Insolvency and Governance Bill 2020, which is currently going through Parliament, provides new provisions that prohibit termination clauses that take effect upon an insolvency event.

It also means that when a company enters into a formal insolvency process (not just administration of CVA, as with section 233A), a supplier to that company is not entitled to cease supplying goods or services under the contact as a result of the insolvency process.

Further, where the supplier was contractually entitled to terminate the contract or supply before the company went into the insolvency process, the supplier will not be able to exercise that termination right once the company is in the insolvency process.

Energy suppliers should review their terms and conditions now

In light of this, suppliers may start looking to terminate contracts earlier and prior to a formal insolvency event taking place. To ensure that they are able to do so, energy suppliers may wish to revisit their terms and conditions to ensure that they are protected as much as possible in the unfortunate event of a customer becoming insolvent.

Contact us

If you have concerns around the risk of your customers facing financial difficulty, or would like to discuss your terms of supply more generally, then please contact Tim Speed, litigation partner in our energy team.

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