Insolvency changes under fire: Lower status for bank loans 'threatens recovery' - DTI reports investigations up

INSOLVENCY specialists warned yesterday that government proposals to reduce the status of banks in company bankruptcies, ranking them alongside other creditors in the payout, would discourage them from lending and might already be slowing the UK recovery.

Chris Hughes, senior insolvency partner with Coopers and Lybrand, said: 'If a banker cannot use his umbrella on a rainy day, he may choose to invest his money in a sunnier climate.

'Such ideas may already be blighting the willingness of banks to lend, which must in turn inhibit economic recovery. The Government should signal at an early date that they have not declared open season on the banking community.'

Coopers & Lybrand and Touche Ross, which have two of the largest insolvency departments in the UK, also attacked the failure of the Department of Trade and Industry to disqualify enough directors of bankrupt companies.

Since 1986 liquidators have submitted 28,000 reports to the DTI recommending that directors be disqualified from becoming a director again, but to date only 1,700 disqualifications have been achieved.

Both Touche and Coopers said that the DTI did very well with the resources at its disposal, and that its pursuit of directors who had damaged 'the man in the street' had been effective. But they said the DTI needed more people to pursue cowboy directors who had damaged the financial community.

Yesterday the DTI reported that its Investigations Division had started 79 enquiries in the third quarter of 1993 - nearly double the previous quarter - and that it had completed 53 cases compared with 45 in the second. The division also obtained criminal convictions against 44 people involved with insolvent companies. Eleven of these were disqualified as directors for periods ranging from two to 15 years.

The suggestion from the DTI that the banks' status in company bankruptcies should be reduced, made in a consultative document in October 1993, drew heavy flak from Coopers. The clearing banks are also concerned by the suggestion that they should be ranked more closely alongside unsecured creditors, but are unwilling to comment publicly before the March deadline for responses to the proposals.

The British Bankers' Association is still preparing its response, but a spokesman said yesterday: 'We wouldn't wish to see any measures introduced that would impede banks in supporting companies that might be in difficulties.'

Stephen Swaden, a partner with the insolvency specialists Leonard Curtis, said: 'It's very dangerous to undermine the current basis of bank lending. In an ideal world it would be very nice to have lots of different ways to rescue companies, but a lot of them are already misused by directors and accountants.'

However, Touche Ross did say in its annual business failures review that, barring some wholly unexpected disaster, total UK receiverships in 1994 should fall to fewer than half 1992's peak figure of 5,100.