Insolvency - Crown to cede creditor rights

The government will take the first step to sacrificing its preferential status as a creditor to failed companies in a consultation paper on company rescue mechanisms to be published later this month.

Insolvency specialists have argued the government must make changes to its own preferential status if trade secretary Stephen Byers’ dream of a US-style entrepreneurial culture is to take root in Britain.

The joint DTI/Treasury paper is also expected to pave the way for the removal of banks’ preferential status and reform company voluntary arrangement schemes to give businesses a rescue period to produce a recovery plan.

Allowing the crown to secure first rights over failed businesses has been widely criticised as denying other creditors the chance to recover money.

Steve Hill, insolvency partner at PricewaterhouseCoopers, said: ‘If there is a desire to be moderately radical and encourage more businesses to be rescued, then you have to do something to stop the VAT man putting the boot in.’ He added that the government has to give up some or all of its rights if it expects the banks to sacrifice the ßoating charge – a concept that allows banks to secure a preferential status second only to the crown.

Buchler Phillips managing partner Simon Freakley and Herbert Smith partner Steven Gale agreed that a reworked CVA procedure was most likely to be changed.

The move follows last week’s announcement of consultation on reforms to personal bankruptcy allowing ‘responsible bankrupts’ a quick recovery.