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04/03/2010

Over 2,000 businesses face liquidation as suppliers ‘hold them to ransom’

The insolvency trade body has launched their campaign for a change in the law which could result in over 2,000 more businesses being rescued each year. The “holding rescue to ransom” campaign is calling for a change in legislation which would prevent suppliers demanding extortionate ransom payments, increasing their prices or ceasing to supply as a company goes into formal insolvency.

R3 President Steven Law commented:
“When a business has to make a ransom payment it effectively prevents any chance of rescue. In these cases suppliers are not recouping money lost; they are ‘taking advantage’ to the detriment of other creditors. It is unnecessary for suppliers to take this action as those who continue to supply during insolvency have the security of being paid as an administration expense – ahead of all other payments.

“Our members have seen cases where utility companies and other suppliers have more than doubled their tariffs when a company was trying to trade through an administration. Insolvency need not be the death knell for a business, but the actions of some suppliers make it impossible for insolvency practitioners to save a business.”

Insolvency practitioners estimate that more than 22% percent of administrations are pre-packed because of fear that suppliers will take unreasonable actions during insolvency. They also believe that 14% of liquidations could be avoided if suppliers continued to supply at pre-insolvency contract price.

Law continued:
“We are not asking for special treatment for companies in a formal insolvency. We merely want suppliers to give business rescue a fighting chance. Provided that bills are paid on time and in full, suppliers should continue to supply on the same terms as before the formal insolvency, rather than take advantage.”

Pauline Osborne, FSB North East, said:
"The FSB in the North East supports the campaign headed by R3. Small businesses need to be supported to help the economy to fully recover and grow. There is no doubt that small businesses have faced a number of challenges over the past few years and this campaign could help more to survive."

The insolvency profession believes that an amendment in insolvency law would lead to an improved rescue culture which would benefit the business community and the wider economy. The change has cross-party support from MPs:

Lorely Burt MP:
“People forget the human cost of liquidation: when a business is liquidated employees lose their jobs. Whilst I have sympathy for suppliers, they should not be allowed to act like vultures and take advantage of an insolvent business. It has never been more important for insolvency practitioners to be able to rescue businesses, and subsequently save more jobs. The change R3 is campaigning for would benefit UK plc as a whole and is extremely important in the current climate.”

Gordon Banks MP:
“A strong rescue culture is good for businesses and creditors alike and I would like to call on the Government to launch a consultation on this important issue. The rescue of a business through administration tends to generate a better return to creditors than other insolvency procedures. This can only be a good thing - the more creditors receive in the event of insolvency, the more likely they will be to lend to other businesses in the future.”

John Glen MP:
“When the existing law came into force, it was a product of the time – the 1980s. It urgently needs updating to reflect the realities of modern business. If this piece of legislation was being drawn up now there is no way that it would exclude IT suppliers.”

[1] Section 233 of the Insolvency Act 1986. 

 


Note to editors: 

  • The campaign was launched at a roundtable event in Portcullis House in the House of Commons on March 1st 2011.

  • On the 28th February 2011, in response to Lord Harrison’s Parliamentary Question (PQ), Baroness Wilcox, The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills, said:

  • “Th[e] Government have not carried out an assessment as to whether Section 233 of the Insolvency Act 1986 should be updated. Any move to include such supplies would of course have implications for the suppliers themselves and would need to be carefully considered in this context. The Government are aware of the recent campaign launched by the Association of Business Recovery Professionals on the subject of termination clauses and Section 233 of the Insolvency Act 1986, and government officials will be discussing this issue with the main stakeholder groups in the near future to explore the level of support and the implications of any change to the existing law.”

  • So far the campaign has gained the support of: FSB North East; Lorely Burt MP, Gordon Banks MP, John Glen MP, and other stakeholders such as the ACCA.

  • See the Rescue to Ransom campaign

R3 Press Office

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.