As is now widely acknowledged, including by the company itself, Thames Water (TW) is facing significant financial difficulties. The company has a £190mn debt to repay in April 2024 and at present is suggesting that it does not have the means to make settlement. This means that the company might be technically 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, means that in its current format it is financially unsustainable. But can a water company be bankrupt?
Why is Thames Water insolvent?
Insolvency is a dire situation for any company to find itself in. TW 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 need to be provided with water, whatever the financial state of the company. It is simply not possible to imagine that there can be a disruption to the supply of water. So, TW cannot cease to trade, although in what form it will continue is not clear.
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 not only that they will be paid for services that they have already supplied to TW, on which many will be dependent for their own financial stability, but also that they will be paid for their continuing services once the company is in administration.
Unlike normal insolvencies, where unsecured trade creditors usually lose out very badly, in this case that cannot happen, as it’s unacceptable for continued water supplies to be threatened.
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 laws to restrict the right of workers in public utilities to withdraw their labour, then it could clearly do the same to ensure the continuity of water supply to a quarter of the UK’s population.
Alternatively, it could nationalise it, taking over the trade of TW, to guarantee continuing supply.
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.
Legislative priorities: Rwanda or water for Londoners?
Of these options, I prefer the idea of emergency insolvency legislation to be used in the case of public utilities. This option would provide a clarity at the time of insolvency that the other options look unlikely to deliver. It 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, and could be immensely damaging for millions of people.
A complex process
Any settlement must cope with very complex structures and relationships. In particular, there will be charges secured by the loan creditors of TW over many of its assets.
Its last accounts suggest that there are approximately £23bn worth of assets in the company, financed by borrowings that exceed £15bn, 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 therefore likely 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, means emergency legislation will be required to deal with this situation. That legislation will have to prioritise creditors who must be paid to ensure the continuity of supply of water over the normal claims of the secured creditors in insolvency. 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.
Squeals of protest
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 clearly no government can contemplate. However, without legislation, they have the law on their side, which is why a new law is needed.
This is not to say that the loan financiers to TW would not have a claim for payment from any liquidator seeking to re-establish the company 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 former 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. No alternative is conceivable, given that the business is financially unsustainable its current format, and that it has substantial obligations to make investment to maintain the trade. All this must be taken into consideration when valuing existing assets which are not fit for purpose.
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.
Lessons must be learnt
There is, of course, one final point to make. 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.
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.