Insolvency regulators will flag-up key flaws in ambitious government plans to pump cash back into troubled businesses looking to avoid financial collapse.

In its response to the government’s ‘Encouraging Company Rescue’ consultation which began in June, the Insolvency Practitioners Association will warn against emergency lenders being given ‘super-priority’ status.

This would see them leapfrogging other secured creditors when being paid back to stimulate funding during the recession.

But the IPA will stress any company that has a genuine chance of rescue will not find it difficult to persuade lenders to rescue money, stripping out the need for the special treatment.

Maurice Moses, IPA board member and restructuring partner at Ernst & Young, said the body had given any efforts to promote company rescues ‘a cautious welcome, but raised questions whether some of the procedures were needed’. The IPA is particularly concerned that existing lenders who have already assessed the risk involved in funding a company and priced it accordingly would have their positions ‘trumped’ by new backers.

The proposals also include extending a Chapter 11-style moratorium against creditor action to medium and larger-sized companies so they can also benefit from a ‘breathing space’ from their debts.

But an IPA source shot down this plan because the option was ‘not widely used’ among smaller businesses.

Companies in a moratorium are still officially in the hands of directors and the IPA will warn there is no guarantee larger businesses will be in a better financial position three months after being ring-fenced. ‘You’ll just have the same problems only on a larger scale if the moratorium is extended,’ said an IPA source’.

The consultation closes on 7 September.