Business Finance – A lion’s den of creditors.

The removal of crown preference for the taxman could make it a more aggressive creditor forcing company directors to manage their cashflow better, according to insolvency practitioners.

This change in legislation, proposed in the new Enterprise Bill unveiled by chancellor Gordon Brown in June, will create a more level playing field in which every creditor must fight for himself.

But insolvency experts say this will lead government agencies that enjoy crown preference – the Inland Revenue, Customs & Excise and the Department of Employment – to become less lenient towards debtors.

Keith Goodman, senior partner at Leonard Curtis, explained that preferential creditors sometimes put companies into insolvency proceedings when debts remained unpaid, knowing they would get ‘second bite of the cherry’ after secured creditors.

Insolvency practitioners say this has led to debtors putting off their payments to the government in order to pay off other creditors.

According to Roger Oldfield, president of R3, the association of business recovery professionals: ‘People use the taxman as an unofficial banker.’

But the new law proposals are likely to change all this. Oldfield said that, following this change, the government ‘should be as commercial as every other creditor, and it shouldn’t extend credit as it has in the past.’

Goodman confirmed this: ‘Any creditor who loses preferential status will be a more diligent debt collector.’

The timing of the proposed law change is not a coincidence, said Goodman.

He said it has coincided with a serious revision within the debt-recovery services of the government departments that enjoy preferential status.

‘I don’t think there would be a move to abolish crown preference unless they had improved their debt-monitoring services. They’re now on the ball so they don’t have to use their privilege as much.’

But Goodman explained that, besides crown preference, government creditors have powers such as the right to send in a bailiff.

This is not a right given by preferential status but by common law, so it is unlikely it will be removed under the proposed changes. The Inland Revenue and Customs & Excise could use this added leverage to claim their debts.

Goodman said government creditors may feel they are entitled to use this extra leverage because they are involuntary creditors, as the money owed to them arises from the normal running of business.

‘It will be a shame if they do that because it is not in the spirit of what we do here, ‘ he said.

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