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Standing up for the small guys
Page 39
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A new law gives small companies a fighting chance when Creditors' rights facing closure. Accountant John Davies reports.
ON 15 SEPTEMBER, UK insolvency procedures changed dramatically. The government hopes this will keep more businesses alive. At the same time it hopes ordinary trade creditors will get a fairer deal if their customers go bust.
The changes being brought in under the Enterprise Act 2002 affect, firstly, receivership and, secondly, the rights of different types of creditors in formal insolvencies.
Receivership A lender of finance to a business usually insists on appointing a receiver or, more usually, an 'administrative receiver' — one who is basically takes charge of the whole of the company's property — in the event of the borrowing business defaulting.
If the company defaults on its loan, the receiver takes control of the business and realises whatever assets are available to pay the lender the money it is owed.The receiver is answerable only to his appointer and not to the business or to its other creditors. By the time he has finished there is often so little left that the business has to go into liquidation.
Less control for banks But from now on, banks lose the right to appoint an administrative receiver in this way. Instead, they can appoint an 'administrator'. The main difference is that the administrator's objective will be to save the company as a going concern. So, rather than asset stripping, an administrator will come in and try to sort out the company's financial problems.
Cutting out the courts The administration procedure has been inefficient so the government is also streamlining it to remove the need for court involvement.This will cut costs and make it easier for companies to go in and out of administration.
Note, though, administrative receivers can still be attached to agreements pre-dating 15 September; only future agreements are protected from this by the law. The second big change relates to creditors' rights to payment in formal insolvencies. Currently, certain classes of creditors enjoy better rights than others. The Inland Revenue and HM Customs & Excise got their money first; then banks.
As from 15 September, debts owed to government departments no longer count as 'preferential'. Other categories of preferential debts, including unpaid wages and pension contributions, are not affected.
This leaves more money for trade creditors. In respect of individual insolvencies, all such 'Crown' money will go to trade creditors. In corporate insolvencies, the amount going to trade creditors is worked out by a set formula; where the assets available to floating charge holders exceed £10,000,50% of the first £10.000 and then 20% of the rest should be made available to trade creditors.
How it affects you So what will these changes mean for small businesses in practice? Largely it's good news — even if a business falls behind with its repayments on a loan agreement, the worst that can happen is that its bank appoints an administrator rather than a receiver.
Companies with only temporary problems, are much more likely to survive. But it's worth remembering that an administrator will only keep the business going if it is viable to do so and if it is in the creditors' interests. •