Suppliers are urged to stop holding firms 'to ransom'

Suppliers should be stopped from holding companies in financial difficulty “to ransom”.

Last week the Insolvency Service (IS) published recommendations it had received on how to encourage rescues in a company voluntary arrangement, a legally binding insolvency process that allows a business to repay some or all of its debts based on future profits.

The European High Yield Association, which represents European leveraged finance markets, said CVA rules should prevent suppliers, such as utility and software vendors, from holding companies “to ransom” by withholding supply.

Backing that view was insolvency professionals trade body R3, whose survey of members found that three quarters supported an extension of existing procedures to include “forced supply of services” ­ as long as normal contractual payments were met.

“You can’t have one creditor holding out and upsetting the apple cart for everyone else,” said Mike Jervis, restructuring partner at PricewaterhouseCoopers. “If a creditor holds out services until they receive payment it is not fair on everyone else, although each case is different,” he added.

However, the City of London Law Society felt a cautious approach should be taken towards a change against the suppliers, as it could undermine their protection in an administration process.

The IS had two proposals which it invited reaction to. The first was an extension of moratoria (postponement of payments to creditors) available to companies seeking a CVA; the second looked at creating a new court-sanctioned moratoria of up to three months to allow companies to seek a CVA.

It looked at how it could provide companies with protection from creditors, as well as whether a company in temporary financial difficulty should be given the capacity to raise emergency finance.

GE Capital’s forecast, based on historical and US trends, found that between 40 and 110 companies in the UK over the next three years could be saved with extra finance availability. The British Bankers Association felt it was rare for “sound” companies to find themselves in a temporary funding shortfall ­ this view was backed by others.

The Royal Bank of Scotland felt extra finance could help assist companies in situations where creditors were threatening to destabilise an administration. HSBC said creating emergency credit could have ramifications, such as the rise in the cost of credit generally in the future.

A statement by the Insolvency Service said it “will be taking forward more detailed development of the relevant proposals over the coming months, building on feedback received from the consultation”.