Colin Bird, president of the Society of Practitioners of Insolvency (SPI), said yesterday that the Government had got it nearly right in trying to build a British version of the American Chapter 11 rescue procedure, but that Government plans floated in April gave too much scope for rogue directors.
Mr Bird said that the 28-day protection for troubled companies against bankruptcy proceedings by creditors was basically a good one. But in introducing new legislation for dealing with insolvent companies, the Government might be destroying the balance between creditors and companies.
Under existing insolvency legislation, there is a balance of power between receivers, who have been sent in by creditors to recover money from bust companies, and the directors that control the company.
However, implementing the Government's plans for an automatic 28-day "stay" on the legal rights of creditors to take action against a company would destroy the balance and give rogue directors the chance to bleed a company of remaining assets.
Mr Bird said there was a further problem in the need for a cheap rescue procedure which was also a safe one. On one hand, if an administrator goes in full time to run a bust company, he is in control and creditors can be confident that directors will not be able to shift funds abroad, for instance. This is safe for creditors but also highly expensive.
Receivers have felt sensitive to criticisms during the recession that the fees they earn from sorting out bust companies have been excessive, although they have denied the criticisms.
On the other hand, if the directors stay fully in control of a company which can no longer pay debts, as is possible under the American Chapter 11 system, working out a deal with creditors will be very cheap, as no administrators will be required. However, warned Mr Bird: "You might find that one or two directors will run off with the money."