The International Cotton Association may expel members that deal with companies blacklisted for defaulting on contracts, the trade group said on Wednesday, the latest change in 150-year-old rules aimed at stamping out a problem that accelerated three years ago.
In a statement on Wednesday, the Liverpool, England-based ICA, which oversees global cotton trade, said its members are no longer able to trade with companies on its list. If they do, they risk being expelled from the association, it said. The list contains names of companies that have a proven link with a company that has defaulted on a contract and has an outstanding arbitration award against it.
One of the biggest challenges for the ICA is enforcing awards against defaulters after an arbitration, association President Mohit Shah said in a statement. Many companies ignore the rulings. "ICA members are not allowed to trade with counterparties on this list, but we know that for some time firms have been circumventing the list by setting up and trading through 'phoenix companies' or using trading houses," Shah said.
A phoenix company is a commercial entity which has emerged from the collapse of another through insolvency. The new company is set up to trade in the same or similar trading activities as the former, and is able to present the appearance of "business as usual" to its customers. The pace of defaults skyrocketed three years ago as spinning mills from Bangladesh, Pakistan, India and Vietnam walked away from contracts following a historic rise in prices that lifted them above $2 per lb in early 2011. ICA members voted in favour of the rule change at the ICA's recent general meeting. The change went into effect on Sunday.