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Wednesday, 17 November, 1999, 16:39 GMT
Insolvent firms to get breathing space
The Chancellor has been pushing his "enterprise" credentials

Small companies in the UK facing short term financial difficulties are to be given a breathing space to put together a rescue plan.

The Queen's Speech
The introduction of a moratorium is the centrepiece of the Insolvency Bill, one of 28 packages included in the government's legislative programme for the next year.

But the proposals, outlined in the Queen's Speech on Wednesday, were questioned by the Institute of Directors.

The Bill will also include sections to "improve the efficiency and effectiveness" of measures to disqualify "unfit" company directors.

The idea is to reduce the fear of failure which prevents people taking business risks, while protecting the public.

More risk-taking

The background papers accompanying the announcement said: "The Government wishes to encourage entrepreneurship and risk-taking and facilitate rescue when things go wrong.

"Where fundamentally viable businesses are lost there are consequences for creditors, employees and the wider economy.

"Company rescues can be made more difficult or can be thwarted because of the lack of a moratorium in the existing Company Valuation Arrangement procedure. The addition of a moratorium would offer a company's management a short breathing space within which to put a rescue plan to creditors."

At present, any creditor can take legal action against the assets of the company before a rescue arrangement is formally approved - so increasing likelihood of failure.

Protection from unfit directors

The government also promised that the Bill would include measures to give earlier protection for the business community and consumers from unfit company directors.

Instead of having to rely on a lengthy and expensive court process of disqualification, the plan is that the Bill would allow "the Secretary of State to accept undertakings which would have the same legal effect as a disqualification order made by a court".

The Bill would also provide a power for the trade secretary to require notice to be given before an administrative receiver is appointed.

The planned Bill was first floated in July this year, since when there has been consultation on it. Once published it will have to go through Parliament, the Lords and be scrutinised by committees before becoming law.

No leaking

The Institute of Directors(IoD) said it had concerns over some aspects of the proposed Bill, in particular the breathing space for companies in financial trouble.

The IoD warned that the moratorium on legal action by creditors must be kept short and company assets must not be allowed to "leak away" during the time.

"We must be wary of tampering with the legal rights of creditors. If lenders of money, or sellers on credit, find they cannot enforce their rights, they will become less willing to do business," said the IoD in a statement.

Chris Humphries, chief executive of British Chambers of Commerce, gave the Bill a cautious welcome.

Beware the cowboys

"The Government's decision to reform personal bankruptcy rules is long overdue.

"The stigma attached to bankruptcy in the UK acts as a major barrier to enterprise.

"It is important however that the Bill strikes the right balance between supporting entrepreneurship and protecting investors and the public from cowboy company directors.

"We welcome in general terms the proposals to help rescue viable businesses in short term difficulties."

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See also:
21 May 99 |  The Company File
Number of 'unfit' directors trebles
Links to other Business stories are at the foot of the page.