White Paper calls time on creditors

Stephen Foster, partner, Cameron McKenna

Shashi Rajani, head of corporate rescue, Nicholson Graham & Jones

Nick Angel, head of reconstruction, Ashurst Morris Crisp

Peter Mandelson's influence can still be felt at the Department of Trade and Industry with the unveiling last week of his proposals on changes to insolvency law.

In response to the white paper, Our Competitive Future: Building the Knowledge Driven Economy, the first of two reports by a DTI working party examines proposed shake-ups to the insolvency laws. But will Mandelson's proposals mean UK lawyers will have to struggle with upheavals in the insolvency process?

Stephen Foster, head of insolvency and reconstruction at Cameron McKenna, does not think so. He says: "I think there is a lot of sense in what the DTI is trying to do."

The white paper questions the role of creditors and whether their actions to recover assets should be stayed for a three-month period to allow businesses to examine alternative routes of rescue.

But it is banks which are usually the major creditors of businesses and Foster believes these lending institutions come in for much unfair criticism. He says: "Banks have got good experience and directors who encounter problems must go to them earlier to stem problems."

Foster says the chances of directors consulting banks earlier will increase if a longer period is introduced to let businesses look at more informal methods of company rescue. He also says they need better access to information: "There needs to be educational advice offered to help combat these problems earlier."

Banks may be knocked down the asset recovery pecking order, but the preferential creditor status of the Crown – the Inland Revenue and Customs & Excise and so on – will not escape review either.

Shashi Rajani, head of the corporate rescue and insolvency group at Nicholson Graham & Jones, argues that this could mean more business for lawyers. He says: "Banks usually appoint an insolvency practitioner from an accountancy firm, which in turn usually chooses its own lawyer."

But he argues that banks' lack of priority will mean that: "Accountants will choose their own lawyer which will lend a greater degree of independence to the proceedings.

"With the debtor choosing who to go to, this will open up competition with other insolvency lawyers. It allows debtors to weigh up the quality and cost of who they choose."

But Rajani is critical of the Crown authorities, saying: "Rather than go down a rescue route, I think that they are just happy to clear the books."

He agrees with Foster's sentiments on a "rescue" oriented method of dealing with insolvency problems. He says the proposed three-month moratorium will stop companies getting into a vicious circle of illegally hoarding assets once they are in financial trouble, only to be hit by creditors' legal proceedings later on.

Rajani compares the moratorium to the Chapter 11 method of dealing with company financial problems employed in the US.

He says: "In the UK the laws are very much weighted against directors, they run the risk of being judged in hindsight. But in the US with Chapter 11 the management remains in control and it gives them breathing space to work out the business proposals."

In the UK, however, management control is squarely placed in the hands of the insolvency practitioner.

Nick Angel, head of reconstruction and insolvency at Ashurst Morris Crisp, says that since the early 1990s, receiverships have decreased compared with the high number of business failures at the height of the 1989-90 recession.

He agrees with Rajani's views on Chapter 11, but says one of his main concerns is the laws on the disqualification of directors, which the white Paper also addresses.

Angel says: "I am pleasantly surprised the DTI is looking at this in today's economic climate."

He adds: "I do not think that the laws are tight enough… The old regime has been in place now for about 13 years."