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As is now widely acknowledged, including by the company itself, Thames Water is now facing significant financial difficulties. That company has a £190 million debt to repay in April 2024 and is at present suggesting that it does not have the means to make settlement. This means that at a technical level the company might be insolvent and might need to enter into insolvency administration. The enormous quantity of debt that has been piled upon this company, coupled with the increase in interest charges over the last two years has placed it in a situation of financial unsustainability in its current format.
Insolvency is a dire situation for any company to find itself in. Thames is, however, in a very different situation from most companies for some very particular reasons.
Firstly, as should be obvious, the customers of Thames Water will need to be provided with water, whatever the financial state of that company. It is simply not possible to imagine that there can be a disruption to the supply of water to these people. Thames Water cannot then cease to trade, although in what form it will continue is not necessarily known.
Secondly, if that is to happen, the infrastructure that permits that supply must continue to exist. This means that the continued cooperation of large numbers of suppliers and contractors to the existing company will be required. In that case, they will need to know that they will not only be paid for services that they have already supplied to Thames, on which many will be dependent for their own financial stability, but will also need to know that they will be paid for their continuing services now that the company is in administration. In contrast to most insolvencies, where the unsecured trade creditors of the company usually lose out very badly, in this case that cannot happen unless continued water supplies are threatened, which cannot be acceptable.
In that case, the insolvency of Thames Water could not proceed under normal insolvency arrangements. That is because under those normal rules the priority of the insolvency administrator is to make repayment of the secured creditors before anyone else, with all other interests being sacrificed to this singular demand.
This leaves the government with three options. The first is to pass emergency insolvency legislation that guarantees continuity of supply in these cases. If it can make such arrangements to impose demands on personnel in public utilities who wish to withdraw their labour, then it could obviously do the same to ensure the continuity of water supply to a quarter of the UK’s population.
Alternatively, it could take over the trade of Thames Water in the event of its insolvency to guarantee that continuing supply took place.
Thirdly, it could provide an unlimited guarantee to the insolvency administrator, but that would appear to be unacceptable because that is likely to still leave the insolvency administrator compromised with regard to the legal claims of secured creditors, which they would still be obliged to settle first and which the government might not wish to pay.
Of these options, I prefer the idea of emergency insolvency legislation to be used in the case of public utilities. This option would provide clarity at the time of insolvency that the other options look unlikely to deliver. That would, however, require that the government take emergency action in advance of Thames Water admitting its insolvency. Whether this government has the foresight to pass this genuinely necessary emergency legislation in preference to, for example, its Rwanda Bill is, however, open to question. I think it should be doing this now: this failure is now clearly foreseeable.
The advantage of such emergency legislation would be apparent when dealing with the other complications that this insolvency will unnecessarily create because of the complexity of the structures that have been created around Thames Water.
In particular, there will be charges secured by the loan creditors of Thames Water over many of its assets. Its last accounts suggest that there are approximately £23 billion worth of assets in the company, financed by borrowings that exceed £15 billion, most of which seem to be secured by complex cross-guarantee arrangements that will inevitably create a legal claim to ownership of the assets of the business in the event of its failure. It is likely as a result that unless measures are taken to protect the ongoing trade creditors might take action to claim the assets of the business to protect their own right to payment. However, given that those assets are critical to the ongoing supply of water, this possibility clearly conflicts with the public good and cannot, as a consequence, be allowed to take place, whatever the structure of the guarantees provided by the company to its loan creditors in the past.
This, almost inevitably, requires that emergency legislation will be required to deal with this situation. The normal claims of the secured creditors in insolvency will have, as a matter of fact, to be subordinated in the case of Thames Water to the claims of those creditors who must instead be paid to ensure the continuity of supply of water, for reasons noted above. In addition, the right of the secured creditors to demand the sale of the assets of the company in an effort to recover sums owing to them will have to be suspended in the case of this company.
This should not be a surprise to the creditors in question, but no doubt squeals of protest will arise at this suggestion. When they do, the question to be asked will be why these creditors ever thought that they could claim a charge over assets whose sale might threaten the water supply to one-quarter of the UK population, which would very obviously be an impossible outcome for any government to contemplate. However, without legislation, they have the law on their side, which is why new law is needed.
This is not to say that the loan financiers to Thames Water would not have a claim for payment from any liquidator seeking to re-establish Thames Water as a going concern, whether under state or private ownership (and given that state money is inevitably going to be involved in this process, the first of these options seems to me to be very obviously the most desirable). Loan financiers should be paid the fair value of the assets over which they have charges subject to the fact that those assets will necessarily be used in the ongoing trade of the business, because no alternative is conceivable, and taking into consideration the fact that the business in question is, first of all, financially unsustainable its current format and, secondly, has substantial obligations to make investment to maintain the trade which must be taken into consideration when valuing existing assets which are not fit for purpose. Thirdly, the costs of the necessary transformation of the company to become net-zero compliant between now and 2050 must also be taken into account. I suggest that this valuation basis must be created by law.
What the remaining payment owed might be, I do not know. What I do know is that valuation on any other basis would be wholly unreasonable, and I cannot see a court supporting creditors in any claim that they might bring against this basis of valuation, which is a fair reflection of market worth given the current state of the business, even if it results in them suffering considerable losses – as I think would be likely.
There is, of course, one final point to make, which is that the shareholders in the business will necessarily lose all sums that they have invested in it. The pension funds that represent most of those holdings should, I think, take more care with their investments in future. They should not stake their members’ interests on the folly of privatised utilities when it is clear that the supply of vital public services must be in public hands. There will be an expensive lesson for them in this – but it is an essential one that they must learn.
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