The Bill will make it easier for firms facing liquidation to make deals with creditors by providing the option of a 28-day moratorium to give the firm's management a breathing space to put a rescue plan to creditors.
The initiative is part of a wide-ranging programme by Stephen Byers, Trade and Industry Secretary, to reform the legal system in order to promote risk-taking by entrepreneurs.
The Insolvency Service, part of the Department of Trade and Industry (DTI), sent out details of the draft Bill yesterday to gauge reaction from company doctors who would have to implement the rescue schemes. Responses have to be in by 20 October, and the Bill will be part of the Queen's Speech.
The moratorium will form part of the existing "Voluntary Arrangement" under which troubled companies make deals with creditors to extend payment terms in order to avoid going bust.
The proposals were warmly welcomed by the Society of Practitioners of Insolvency (SPI), the trade body for company doctors. Stephen Gale, vice- president of SPI, said: "We have been asking for some time for a moratorium period for Voluntary Arrangements. We are delighted to see it proposed."
Mr Gale said the new system would give the insolvency profession "an additional technique to rescue more companies. We hope we can use this initiative to work with companies to prevent them going bust".
Company Voluntary Arrangements (CVAs) have grown in popularity with company doctors as a rescue mechanism, as they are far cheaper and quicker than other types. In 1990 there were 58 CVAs compared to 3,988 receiverships and administrations. In 1998 there were 470 CVAs and 1,383 receiverships and administrations.
Mr Gale says the CVA mechanism misses only this vital component - the moratorium. It should also benefit unsecured trade creditors, who normally do badly when companies go bust.
CVAs pay out nearly 43p in the pound to unsecured creditors on average, compared to 25p for administrations and a mere 3p for receiverships, said Mr Gale.Reuse content