Business Recovery – Philip Sykes.

With the consultation on the insolvency white paper closing, there are two key issues that the DTI should concentrate on while preparing the bill’s publication in January.

One significant change is that banks and other floating charge debenture holders will no longer be able to appoint administrative receivers. This is an enormous change to the fundamental right, under English law, of a secured creditor to enforce his security and has been seen as creating a dramatically different corporate insolvency landscape.

To mitigate this, the proposed insolvency regime will enable banks and other secured creditors to petition the court for an administration order, where necessary without notice to the company, and ask for the appointment of an administrator of their choosing. So one could argue that the abolition of administrative receivership will make little difference.

Under existing law, however, approval of the administrator’s proposals for sale of the business and dealing with the assets are dependent on the votes of unsecured creditors. Although collective procedures, where all creditors have a voice, are a worthy concept, they are also a recipe for stalemate between conflicting interests.

The new legislation must provide for the rights of secured creditors to have priority where they conflict with those of unsecured creditors.

Otherwise their security becomes worthless. Too great a transfer of power from secured to unsecured creditors will reduce bankers’ appetite for lending if they cannot see a clear recovery route. At a time of imminent recession, such undermining of confidence must be avoided.

The government has decided that ‘the stigma of failure … works as a deterrent to entrepreneurial initiative’. As a result, they plan to reduce the period of bankruptcy to a maximum of 12 months ‘with the majority being discharged much earlier’ if the official receiver confirms that there are no matters of misconduct.

If you’re a small-businessman who gets into difficulties, this is attractive.

However, reducing the penalties provides an easy way out. Debtors will be far more likely to opt for a short term of bankruptcy and have their debts cleared, rather than pay their creditors over a few years through individual voluntary arrangements. IVAs have been one of the success stories of the 1986 Insolvency Act and the new legislation should reinforce this, not provide an easier alternative.

– Philip Sykes is senior corporate recovery partner at Moore Stephens.

Related reading