Ruthless suppliers at fault for pre-pack administrations

Trade body calls for changes in Insolvency Act 1986 to prevent utility and IT suppliers from holding insolvent firms to "ransom"

Insolvency laws should be changed to prevent suppliers from raising their tariffs to firms after they go into formal insolvency, forcing them into a pre-pack administration.

This is the call from R3, a trade body that claims to represent 97 per cent of the UK's insolvency practitioners (IPs).

R3 argues an amendment to the Insolvency Act 1986 will lead to a 20 per cent reduction in pre-packs.

Pre-packs involve the pre-arranged sale of struggling firms before formal insolvency procedures have begun. The mechanism – deemed controversial in some circles – is often used to sell insolvent businesses where commercial pressures require urgent action.

R3 president Steven Law, said: "Unfortunately, our members are now handling cases where utility companies and other suppliers have more than doubled their tariffs when the business was trying to trade through an administration.

"Insolvency need not be the death knell for a business, but often a supplier's actions reduce the options available to an insolvency practitioner. In many cases the only options left are to sell the business as quickly as possible or simply shut it down."

A survey of R3 members found that 22 per cent of administrations are pre-packed because IPs fear suppliers will take unreasonable actions during insolvency, making it impossible to trade the business.

Through its Holding Rescue to Ransom website, R3 is campaigning for Section 233 of the Insolvency Act 1986 to be changed.

Currently, only utility firms are obliged to continue supplying firms after they go into formal insolvency. R3 would like to see this extended to IT firms and for both utility and IT suppliers to be required not to increase their tariffs for insolvent firms.

"We are not asking for special treatment for companies in a formal insolvency," said Law. "We just 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."