Supply and demand
25 March 2002
24 July 2013
28 January 2014
8 July 2013
27 June 2013
10 February 2014
Earlier this year, Land Rover Discovery won a last-minute judicial stay of execution in the form of a groundbreaking injunction in the High Court that forces the receiver of its ailing supplier to keep on providing chassis in spite of crippling debts.
Receiver KPMG had demanded a goodwill gesture of between £35m and £45m from Land Rover to keep UPF-Thompson, the sole provider of Discovery chassis, afloat after it went into receivership at the end of last year. Needless to say, the Birmingham-based manufacturer was not happy with what it perceived to be such strong-arm tactics.
The injunction was a welcome break that prompted Land Rover's chairman Bob Dover to call for a reform of the insolvency laws to prevent receivers holding other manufacturers to ransom. "The landscape of British business will be irrevocably altered if this becomes common practice," Dover warned last month. "[Many] of those small companies that form so crucial a foundation of manufacturing industry in the Midlands will be wiped out."
If KPMG had been allowed to deliver on its threat then there would have been no more Discoveries rolling off the production line and 1,400 jobs would have been axed at the Solihull site.
Nicola Mumford, a commercial litigation partner at Wragge & Co who represented the Birmingham-based car company, says: "If Land Rover had given in to this demand, it would have been an incredibly dangerous precedent to set. There had to come a time when they had to say, 'Whatever the courts say, we simply can't afford to give into these demands and we have to make a stand'."
Last month, a compromise was reached and the off-road car company has agreed to take on £15m-£16m of the supplier's debt.
According to Dover, the answer to its problems, and those of other manufacturers reliant on sole suppliers, lies in the US Chapter 11 insolvency regime. It features a 'debtor in possession' procedure that effectively allows a failing business's management to remain in charge while a rescue strategy is put in place. "We've got to sort the law out on this," Dover says. "There's a place for receivership, but we can't be expected to take on a company's liabilities."
Land Rover's success at resisting the demands of KPMG has been something of a surprise, coming in the face of recent legal precedents.
Chris Hanson, a consultant in Lovells' insolvency and business recovery department, acted for Ford, which coincidentally owns Land Rover, in a similar action against engineering company TransTec. "The supplier went into administrative receivership and it was the only supplier Ford had of this particular component and the receivers were holding out for a very high price," says Hanson. In that case, Ford contended that such one-sided negotiation tactics amounted to blackmail, but Hanson says that the argument was given "very short shrift" by the judge.
He says that judges are reluctant to hand out a mandatory injunction as happened last month. "The court doesn't like to have to police something," he says. "It won't make an order which it can't enforce and it can't put money into hands of an administrator, a director or a receiver that hasn't got it." He distinguishes between Ford and Land Rover by saying that in the present case "a more long-term relationship, or more of a joint venture" might have existed between the two parties.
Mumford says that it was not argued in TransTec that a contract existed between the parties. "If there's no contract there at all then it's arguable whether you would be able to stand up to the receivers in quite the same way," she adds.
Land Rover also contended that KPMG was "effectively abusing a dominant position" contrary to the Competition Act. This was an argument that was consistent with a Court of Appeal ruling involving truck manufacturer Leyland DAF.
Mumford says: "The judge found that Land Rover was dependent on UPF for the supply of chassis and that, as a matter of fact, they enjoyed that position, but he didn't find there was an arguable case that there was a breach of the Competition Act." But she says that the judge did not need to "because he had already found that it was seriously arguable that there was an existing contract".
Many insolvency law practitioners believe that Chapter 11 would make precious little practical difference, despite what Land Rover's chairman might think. "If a company is bust and can no longer perform the contract then it's bust and can no longer perform the contract," says Dan Hamilton, a partner in CMS Cameron McKenna's banking and international finance department.
Nonetheless, policy-makers on this side of the Atlantic have looked at the US regime admiringly and it was even name-checked as an influence in last year's insolvency white paper. A bill is expected to be unveiled this spring.
The main thrust of the proposals is to streamline administration and scrap administrative receivership except for limited transactions in the capital markets, in what has been perceived to be a shift of power away from the creditor to the debtor.
Hanson believes that such reforms might help alleviate the kind of situation faced by Land Rover "because administrators have the duty to all the creditors, not just one". He says: "I don't think an administrator would get away with holding anyone to ransom." However, he adds that "neither a receiver nor an administrator can be expected to put money in his pocket to keep a business going if he can't do it at a profit. You can't run a business without cash flow."
So what is the appeal of the US approach to insolvency? Ken Coleman, a US insolvency law partner in Allen & Overy's (A&O) New York office, says that the concept of Chapter 11 "as a basic philosophy… is a good one". The process provides the breathing room and the tools for a company to stabilise itself and attempt to effect some restructuring either operationally or financially. He says: "The thought is that, in the absence of fraud or gross mismanagement, the best people to guide the company through either a restructuring or orderly liquidation are the management."
UK insolvency law practitioners with experience of the process say that it is both lawyer-heavy and time-consuming. Coleman says: "Sure, there have been cases in our bankruptcy courts that have languished for too many years and have resulted in a loss of value, but there are a great number of situations where value has been preserved and in many cases enhanced by the process."
He explains that Chapter 11 creates "an automatic stay", preventing creditors from taking any action to receive payment of debts. "There is a deeply embedded concept in Chapter 11 that all creditors with the same priority should be treated equally," he says. However, this general rule can be altered by an application to court for things such as a critical lender motion, which allows for a critical supplier who is not under a contract to continue supplying and whose products are necessary for the company to survive.
But in the Land Rover scenario, Coleman sees little to choose between the insolvency regimes. "For a non-debtor party to a contract to seek to force a debtor to perform would be an extraordinary event because it runs afoul of their right under the bankruptcy code to make the election as to whether to perform the contract or not," he says.
Such a decision is supposed to be based on the debtor's business judgement about what is best for the bankrupt estate.
Camerons' Hamilton believes that cases such as the Land Rover saga might reveal less about our insolvency law than they do about the outdated modes of practice in the motor industry. Manufacturers often keep sole suppliers under strict contracts where they are paid a price not per piece, but over a period of time. "In effect, a lot of motor manufacturers are not manufacturers but assemblers and everything is outsourced," he says. "A fair amount of that is due to selling off their own factories that used to make parts and then just buying in the parts." The flipside of such arrangements is that manufacturers are beholden to one supplier for crucial parts.
"If you're to put these restrictive contracts on suppliers and control them, you also need to monitor them," Hamilton says. "Because if they then go bust as a result of your constraints, or you're just not watching, then you're in trouble."