R3 want the law to prevent suppliers demanding extortionate ransom payments, increasing their prices or ceasing to supply as a company goes into formal insolvency.
The findings of an R3 survey show that more than 22% percent of administrations are pre-packed because insolvency practitioners fear that suppliers will take unreasonable actions during insolvency, making it impossible to trade the business.
R3 President Steven Law commented:
“When a supplier demands a ransom payment it puts a further strain on a business’ already stretched resources. This prevents an insolvency practitioner from trading a business out of insolvency and reduces the amount that can be returned to the body of creditors as a whole.
"In these cases a supplier is not recouping money lost; the supplier is ‘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.
“Traditionally a practitioner would be able to rescue the business following a period of successful trading. 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.”
The survey of insolvency practitioners also reveals that 14% of liquidations – which equates to more than 2,000 businesses a year - could be avoided if suppliers continued to supply at the pre-insolvency contract price.
Law continued:
“We are not asking for special treatment for companies in a formal insolvency. 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.
"This amendment would lead to an improved rescue culture which would benefit the business community and the wider economy.”
