DTI pledges to help ailing firms avoid bankruptcy

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The Independent Online

Hundreds of companies that are struggling financially will be helped to avoid bankruptcy under government proposals published yesterday as part of its drive to create an entrepreneurial culture.

Hundreds of companies that are struggling financially will be helped to avoid bankruptcy under government proposals published yesterday as part of its drive to create an entrepreneurial culture.

Businesses able to prove they can get back on track will be given more consideration, the Department of Trade and Industry promised in a wide-ranging consultation paper.

The system should allow "responsible risk-takers" to flourish, while saving jobs and avoiding costly receivership procedures incurred through needing external accountants and liquidators, the DTI said.

It is privately felt that until now the DTI and other government bodies have been too hasty in pursuing troubled businesses. Government agencies were responsible for 2,000 bankruptcy proceedings last year, and in one in five cases are the source of the call for a company to be wound up.

In cases where formal insolvency is declared, the revenue departments of the Government are first to recover debts, under the system known as Crown Preference.

Under the new regime, troubled companies' cases will be looked at on an individual basis by a new agency to be set up in April under the DTI and Customs and Excise, two of the departments that oversee the process of receivership.

Stephen Byers, the Trade and Industry Secretary, yesterday acknowledged that the Government had been attacked for defending its own interests. But he has dismissed pressure from some parties in the consultation to scrap Crown Preference.

Mr Byers said: "The review group did consider the abolition of Crown Preference but recognised that unsecured creditors would not necessarily gain from its abolition."

Instead, the DTI has called for an end to the current practice of allowing banks to be second in line to reclaim their assets, often leaving many small creditors, including customers, without redress.

The proposal is likely to be strongly opposed by the UK's banking industry as it could lead to them losing millions of pounds of assets they can now claim. According to a study by the London Business School, in cases of formal insolvency banks recover 77 per cent of the debts they are owed, with unsecured creditors receiving virtually nothing.

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