Fewer UK firms set to go bust

The government hopes fewer firms will fold

New insolvency rules aimed at making it easier for companies to get out of financial trouble have come into force.

The government hopes the rules - part of its Enterprise Act - will help foster a "rescue culture" among banks and lenders, with fewer companies going to the wall.

The changes are seen as moving the UK a step closer to the US style of dealing with firms in trouble.

The new law will make it harder for creditors to push firms into receivership, and easier for companies to seek protection from creditors while they seek to get their finances in order.

"We're moving away from one of the most ferociously creditor-friendly insolvency regimes in the world towards the American model," said Nick Hood at insolvency firm Begbies Traynor.

Survival battle

The Enterprise Act will introduce several changes, including one which will see banks having their powers trimmed.

It has long been argued that a less self-centred approach to short-term financial problems could have saved many businesses John Davies, Association of Chartered Certified Accountants

Under the old law, when banks lent money to a firm they could insist on the right to appoint a receiver if the company could not pay its debts.

It this happened, the receiver would run the firm in the bank's interest, using the firm's assets to pay off the money owed to the bank.

It was argued that often after the bank's receiver had finished this task, there was little left of the company and they often went bust.

Improving prospects

However, under the new law banks will no longer be able to appoint a receiver, they can only appoint an administrator.

An administrator differs from a receiver in that they have a legal obligation to try and save the firm as a going concern.

Also, if the company cannot continue, they have an obligation to all creditors, not just the bank who appointed them.

"The abolition of banks' right to appoint receivers should improve the prospects of survival for companies which are only experiencing temporary problems," said John Davies at the Association of Chartered Certified Accountants.

"It has long been argued that a less self-centred approach to short-term financial problems could have saved many businesses and the jobs of those who worked for them."

Breathing space

The new law will also make it easier for firms to put themselves into administration, to give themselves protection from creditors while attempts are made to try and save the business.

We want insolvency to be fast, fair and focussed on rescue Gerry Sutcliffe, DTI Minister

Before the new law came in, companies had to go before a court to apply for administration and as a result it was not widely used.

However, now the procedure is being streamlined and companies will no longer have to go to court to enter administration.

In the US, companies in financial trouble often use what is called Chapter 11 bankruptcy proceedings to give them a breathing space while they try to come up with a rescue plan.

However, under Chapter 11 the firm's management stays in place, whereas under administration in the UK an administrator is appointed to run the business.

'Domino insolvencies'

Another change in the law will see debts owed to the Inland Revenue and Customs & Excise losing what is known as "crown privilege".

This meant that these debts were paid before anyone other creditors, such as banks and other firms, got any money.

More money is now set to go to trade creditors - i.e. other businesses who traded with the firm in trouble.

It is hoped that this change will help reduce so-called "domino insolvencies" - where the collapse of one firm drags down its unpaid suppliers with it.

Better deal

"We want insolvency to be fast, fair and focussed on rescue," said DTI Minister Gerry Sutcliffe.

"These new measures should help to promote a 'rescue culture' and help more companies survive when they get into financial difficulties.

"When it is not possible to save a company, these changes are designed to provide a better deal for unsecured creditors, many of whom are small firms."