Byers moves to protect businesses from the VAT man and Revenue

THE GOVERNMENT will today propose a radical watering down of the ability of the Inland Revenue and Customs & Excise to push companies into bankruptcy, in the biggest review of corporate rescue legislation since 1986.

Stephen Byers, Secretary of State for Trade and Industry, will today publish a long-awaited interim report on a joint DTI/Treasury review of company rescue.

Mr Byers will tell an Anglo-German Conference on innovation that "if we are to encourage responsible risk-takers, we need mechanisms in place, which allow basically viable businesses to survive any short-term financial difficulties they may encounter."

The review's proposals will include a moratorium for troubled companies, to allow them protection from creditors while they put together a rescue plan. It will also suggest that the power of banks to demand repayment from troubled companies could be weakened, and that such companies should undergo a period of observation by a court-appointed specialist who would then recommend a rescue plan.

The review has been prompted by New Labour's ambitions to promote a "rescue culture", ambitions born when Mr Byers' predecessor Peter Mandelson visited Silicon Valley last spring and returned praising American attitudes to risk-taking. Honest entrepreneurs should be treated less harshly than under Britain's present bankruptcy rules, Mr Mandelson suggested, and Mr Byers is pursuing the idea.

The review suggests that company rescue is preferable to company liquidation in many cases because it saves jobs, and even troubled companies are worth more to creditors as a "going concern".

But the proposal to tackle the rights of the Revenue and the Vatman are sure to arouse furious debate in Whitehall - and most support from small businesses, according to observers. New statistics in the report show that in the year ending March 1998 Inland Revenue and Customs & Excise initiated 2,223 insolvency proceedings - one in five of all companies which went bust in the period.

Any move to reduce this so-called "Crown preference" may well be opposed by the Treasury, which would see its ability to claw back unpaid taxes from failed companies seriously diluted by the proposals.

John Alexander, a senior insolvency partner with Pannell Kerr Forster, commented yesterday: "Its a brave Secretary of State for Trade and Industry who would stand up against the Chancellor."

If the proposals do get through it would be very good news for trade creditors, Mr Alexander said. At the moment when businesses go bust the preferential creditors at the top of the repayment queue, including the Revenue and the Vatman, often leave little for trade creditors, who are further down the queue.

There is one type of preferential creditor who should be protected, Mr Alexander added - employees of bust companies. "They've already lost their jobs - they shouldn't lose their last pay packet as well."

The report contains an analysis of creditor rights for major industrialised countries which shows that the UK has the most creditor-friendly regime. In other words, British banks are in the strongest position in relative terms when demanding repayment from client companies which get into trouble.

The least pro-creditor country is France, where troubled businesses have far more legal protection from banks.

The US, which has a strong tradition of protecting companies from foreclosing bankers, also scored in the report as one of the least pro-creditor countries.