Storm Cloud for Insolvency Practitioners?

by K&L Gates LLP

Cloud and Insolvency

With the increasing popularity of cloud computing, more companies are taking advantage of cheap, efficient and globally available data storage options. Obtaining access to data stored in the cloud on termination of the cloud contract, particularly on an insolvency event, may be considerably more expensive and difficult.

What is the Elusive "Cloud"?

The cloud has no defined meaning, but is generally a term used to describe subscription based technology arrangements where individuals or entities outsource their information technology (IT) resources to third parties who manage their data and make it available over a network, usually the internet. Cloud services may be public (such as Gmail, Amazon and Dropbox), private (designed only for access within a specific entity) or a combination of both.

Accessing Data Stored in the Cloud

Traditionally, companies have managed data on a physical server in their office or a data centre in their country of operation. The books and records, and the format of their data, were within a company's possession and control and were easily accessible to comply with the company's obligations under the Corporations Act to keep written financial records. In situations where insolvency practitioners, including receivers, voluntary administrators or liquidators, were appointed to such a company, they could walk into the business and copy all data from the servers current to the date of appointment, without necessarily obtaining or requiring cooperation from the company directors.

Under a cloud contract, data is uploaded into the cloud service provider's network outside the control of the company and the servers can be located in another country or stored in a number of servers across many countries. The company can access their data and records in accordance with the cloud contract.

How do Insolvency Practitioners Gain Access to Cloud Data?

The terms of cloud contracts can vary significantly between service providers and, if not negotiated by the Company at the outset of the engagement, can include terms that are one-sided in favour of the cloud provider. It would depend on the terms of the contract as to whether the provider would simply allow access to the insolvency practitioner without the provision of a court order.

The terms of the cloud contract will most likely determine the ongoing availability and accessibility of the data for an insolvency practitioner, including the format of the data able to be retrieved, which in turn may create a headache for them when trying to obtain the data.

Many cloud contracts contain a provision allowing the cloud service provider to terminate the agreement upon the occurrence of a number of insolvency events. In such cases, the cloud contract may not even permit the company the opportunity to retrieve its data on termination. Cloud providers have significant practical leverage and may demand pre-appointment debt be paid before providing access to data that may be essential to the operation or sale of a business.

For this reason, an insolvency practitioner will need to have the cloud contracts reviewed to determine how to gain access to books and records stored in the cloud. Given the ease with which a cloud service provider can switch off access to data, this should happen fairly quickly upon appointment, once the appropriate systems and data have been identified.

Some of the questions that will need to be answered when reviewing the cloud contract include:

  • When can the cloud contract be terminated (ie is it based on an insolvency event)?
  • How difficult is it, and how much will it cost, to access and retrieve data and take copies of the data? 
  • In what format will the data be provided? Ie are there obligations on the cloud provider to ensure that the data is returned in a meaningful format that the insolvency practitioner is able to view and understand? 
  • Is there a data retention/backup policy and does the provider use an external party for data backup? 
  • Is the data stored in servers in the country of operation of the company or in one or many foreign jurisdictions?

Insolvency practitioners may also need to take the following commercial practicalities into consideration:

  • If possible, should a payment arrangement be negotiated with the cloud provider to maintain access to the data?
  • What are the security and confidentiality policies of the provider? 
  • What resources will be required to assist with access, retrieving, and understanding the data?

Jurisdictional Access Issues

Where servers are located in foreign jurisdictions or foreign third party data centres are utilised, the waters become muddy. Insolvency practitioners may need to consider whether an order for delivery of data by a court in Australia is necessary and, indeed, whether such an order would compel a foreign cloud provider or data centre to deliver the data. The order required will be determined initially by the provisions of the cloud contract. Other factors will include any relevant cross border insolvency regulations, as well as foreign recognition of the insolvency appointment, to determine whether the order made, or proposed, would be enforceable in the country where the data is being stored.

Globalisation of the Collection of Books and Records

The process for retrieving company books and records is becoming more difficult as technology evolves. It is no longer a matter of simply collecting a cardboard box of books and records from a director's home office or downloading a copy of the records from the server onto a hard drive. As company data disappears into the cloud, accessing company books and records may become a global challenge for insolvency practitioners.


Written by:

K&L Gates LLP

K&L Gates LLP on:

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