View from City Road: Sensible relief for firms from creditors

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Hopes were dashed long ago that the 1986 changes to insolvency law would bring about a British version of Chapter 11, the US system of protection for companies against creditors. The new administration procedures proved too expensive and cumbersome and in any case are far more likely to be a prelude to liquidation than a rescue.

At a CBI conference yesterday, Neil Hamilton, the corporate affairs minister, threw his weight behind the use of company voluntary arrangements as an alternative.

There have been fewer than 400 CVAs since 1986. The trouble is that under present law they have serious drawbacks. There is no protection for the company against creditors while the CVA is being drawn up. In practice companies are obliged to go first into administration, which is cumbersome and very costly.

Furthermore, all creditors have to agree to a CVA. If another creditor crawls out of the woodwork after the vote, he is not bound by it, so a CVA is only workable if every creditor can be identified in advance of the meeting and persuaded to attend.

The sensible answer is to introduce a moratorium on debts at the time a CVA is proposed. A CVA should also be brought into line with liquidation, so that creditors who have not responded to advertisements and do not turn up at meetings will be prevented from rocking the boat by putting in later claims.

These two changes are expected to be suggested in a consultative document that Mr Hamilton will produce in the autumn. There will have to be safeguards to prevent the use of CVAs by the unscrupulous. But there are likely to be many firms short of working capital in the economic upturn that could survive if only creditors give them a breathing space.

A sensible, cheap way of doing this would be an enormous benefit to companies and the economy.