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Software Escrow Services in Focus

Published on 17/11/2023

The Alarming Surge in Global Business Insolvencies

The recent spike in commercial insolvencies has been alarming, with data indicating upward trend in company insolvencies, particularly in the last few years the UK government (Insolvency Service Official Statistics) as shown:

  • In 2020, there were 12,631 total registered company insolvencies.
  • This number slightly increased to 14,059 in 2021, reflecting ongoing economic challenges.
  • A significant jump was seen in 2022, with total insolvencies rising sharply to 22,121, indicating heightened financial stress among businesses.
  • The trend continued into 2023, with the first two quarters showing persistent increases in insolvency cases.

A similar story can be seen in the US with an 83% increase in commercial Chapter 11 filings in February year-over-year.

Such trends are reflective of the broader economic difficulties that businesses are currently facing, including the repercussions from the COVID-19 pandemic and the ongoing cost of living crisis. These factors have placed significant financial strain on developers and the software supply chain, leading to heightened risks of bankruptcy.

In this uncertain environment, software escrow services have gained prominence as a critical risk management tool. They act as an intermediary safeguard, where a trusted third party holds the source code, data, and documentation of essential software. This arrangement is pivotal for clients who rely heavily on proprietary software for their business operations. Should a software vendor face insolvency or bankruptcy, the escrow service ensures that their clients retain access to the necessary software assets to continue their operations without disruption.

What are the types of Escrow Release events?

The stipulations for releasing the escrowed materials are clearly outlined in the Software Escrow Agreement. These release conditions are typically negotiated between the software vendor and the client, known as the beneficiary, to suit their particular needs and concerns. Key release conditions include:
Insolvency: Triggered when the software vendor becomes unable to pay their debts, threatening the continuity of software maintenance and support.

  • Bankruptcy: Activated when the software vendor is legally declared unable to pay their debts, which may lead to a cessation of their operations.
  • Discontinuation of Support: If the vendor discontinues support or service of the software application, clients can access the escrow to ensure ongoing software functionality.
  • Failure to Cure a Material Breach: In the event the vendor fails to support the product as licensed to the beneficiary and does not rectify a material breach within an agreed-upon timeframe—commonly 10 days following notice.
  • Transfer of Intellectual Property (IP) Rights: If the vendor transfers the IP rights to a third party who does not guarantee the same level of protection as stipulated in the escrow agreement, the client can claim the escrowed materials to maintain software integrity.

Software escrow arrangements thus serve as a protective shield for businesses, particularly those whose operations are critically dependent on specialised software. It allows them to prepare for and respond to the financial instability of their software providers, ensuring that they can continue to operate efficiently and effectively, even in the face of such challenges.

In the meantime, if you require any assistance or would like to discuss your Software Escrow requirements in more detail, please get in touch.

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