View from City Road: Problems of a 'rescue culture'

The Government's discussion document yesterday returns to the conundrum of trying to produce insolvency laws that will enable essentially sound businesses to survive a temporary cash crisis, while preventing dodgy directors from fleecing creditors.

Neil Hamilton, corporate affairs minister, admitted that the procedures introduced by Sir Kenneth Cork's 1986 Insolvency Act, which was supposed to produce a 'rescue culture', have failed to catch on. There have only been 447 administration orders in England and Wales in the past three years but more than 66,000 liquidations.

Any change in the law, however, will have to avoid following the US example, where Chapter 11 leaves any foxes in the coop as directors remain in charge of their bust companies.

British banks will oppose any such move, and they will probably be unhappy with one of Mr Hamilton's proposals, where secured creditors (in other words, banks) would be bound by a 28-day moratorium when a company seeks a Company Voluntary Arrangement (CVA), a key rescue procedure the Government wants to reinforce. Banks would also be required to give the company seven days' notice of their intention to call in the receivers, during which time the directors would be able to apply for a CVA.

Whether the banks give way on this point - as they should - will be an interesting test of their willingness to promote a 'rescue culture'.

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