Government keen to stop suppliers holding insolvent companies to ransom

27 February 2013

The Government has tabled proposals for an amendment to Enterprise and Regulatory Reform Bill which will force companies to continue to work with Insolvency Practitioners at their normal rates. This is in response to the actions of suppliers who are holding struggling business to ransom, when entering insolvency procedures.

Currently a supplier, such as a utility companies, can force a termination of a contact if a business enters insolvency proceedings such as administration, and demand higher fees for the same service. This results in reduced payments for creditors. The plan is that essential suppliers such as IT and utilities will need to continue supply unless released by the court.

 It will also stop those suppliers from seeking an unfair advantage over other creditors by increasing charges and payments as a condition of their continued work.

Consumer Affairs Minister Jo Swinson said: "Businesses are currently closing down because restructuring professionals are unable to secure the essential supplies they need to continue trading whilst they restructure or seek a buyer. This measure will ensure they can secure the supplies they need to deliver the best outcome for creditors and employees."

Under the changes suppliers will have a right to request a personal guarantee from the IP for payments due post-administration appointment.

Of course, this sounds a good idea in theory but you can't really force a company to supply another company. If the business is trading in administration then there is a risk to that supplier of not being able to continue business going forward or maybe not being paid at the end.  So they should be entitled to some sort of "risk premium".  It is always more complicated than first imagined and in reality this is not the main reason that businesses are unable to be rescued.