Opinion

There is a chance that 'enterprise' will be no better off as a result of the changes that the Enterprise Act will make to the Insolvency Act and to our everyday lives. Credit will get tight due to the new law, and tighter credit tends to harm enterprise

he number of citizens that the state will bankrupt will reduce: perhaps we will see 80 per cent fewer petitions from the Crown as a result of its preferential creditor status being abolished. That would be a good thing. But with the Crown having to join the ranks of the general body of unsecured creditors, there must surely be a chance that the civil servants who used to be employed to pursue the thousands of bankruptcy and winding-up petitions brought each year by the state, will instead switch their attention to more vigilant and unbending debt collection and debt containment methods. If the Crown can't relax, knowing it will be first in line for a preferential dividend, it must surely be planning to seek payment much more promptly from taxpayers. This tightening up could lead to less leniency when a business tries to make a good case for being allowed a little more time to pay. 'Credit' from the Crown is set to reduce. This will hurt many sound businesses, including those that would, until now, have been given the benefit of the doubt by the Crown.

But what about the future attitude of the typical unsecured creditor? At present it despairs of getting a dividend from a liquidator or trustee in bankruptcy. It knows that often the Crown's preferential dividend will exhaust the funds. Perhaps, however, when unsecured creditors realise they are in with a chance of a better dividend once the Crown's preferential status has been abolished, they will consider it more worthwhile to seek the bankruptcy or liquidation of a slow payer. So, as the Crown starts to cut back on the number of petitions, unsecured creditors might start petitioning with greater frequency.

Will such creditors also seek to take security from customers more often? They will be mindful (eventually) of the fact that secured creditors are still to be treated as the darlings of the insolvency regime. Later this summer, the ability of a secured creditor to bring about the administration of a company quickly and cheaply will be enhanced when the Enterprise Act changes come in. Death by 'administration on demand' may threaten many a company. The new law creates a situation where a company can be put into administration without a judge first forming a view on the merits, and without the company necessarily being insolvent. Once such a link is made it will rarely arise again in the same form. The victim company can argue over who the administrator should be, but not over whether it should be in administration at all. Can this really have been intended?

At present it generally takes between 10 and 24 weeks from the start of bankruptcy proceedings before the bankruptcy order is made. Certainly, it takes this long if the debtor applies, but fails, to set aside the statutory demand. Even one adjournment of the hearing of a bankruptcy petition can deliver roughly six weeks of further delays to a debtor.

The changes from 2004 onwards, which abolish the minimum three-year duration for most bankruptcies, will produce the strange result that the bankruptcy itself could last for less time than it took the creditor to obtain the bankruptcy order. There is reason to think that, from 2004, some bankrupts will receive their discharge within 20 weeks of its start. Not much time for thoroughness. Worse, if bankruptcy is seen as such a quick process, there must be a chance that some cynical debtors with few if any realisable assets will treat bankruptcy as a cheap way of wiping out large debts almost painlessly. It is fairly safe to assume that a sizeable percentage of these cynics' debts will be owed to people who supplied 'plastic credit'. I predict, then, that plastic credit providers will have to toughen up. As a result, the rest of us will suffer, as the tightening up will apply to all of us: credit application forms will become more complicated; it will take longer to get credit reference clearance; and more and more 'good' credit risk applicants will find themselves delayed or knocked back. If credit tightens unduly, the economy falters. If the economy falters, enterprise suffers. Whoops.