Controversial Insolvency Service Proposals

Measures proposed by the Insolvency Service to help distressed companies could in fact inflict further pain, increasing the cost of credit and further reducing incentives to lend..

Creditors are likely to regard the proposals as an unwelcome continuation of the trend towards "pre-pack" administrations - where the business of a distressed company is sold to management while having some of the debts written off.

Among the proposals, companies could privately apply to the courts for a moratorium from their debts without existing creditors' knowledge. The rights of existing lenders to security over borrowers' assets could also be overridden, to help companies find rescue financing elsewhere.

This proposal says that a lender's security over assets could end when the company gets into trouble. That is exactly when a lender needs to have security over the assets they've lent.  Such legislation will see lenders regard lending made to businesses as more risky and hence interest rates offered by banks will increase or even worse, they may simply become even more stringent with regard to whom they will lend money to.

The Insolvency Service's consultation period on the proposals closes on Monday.

Posted at 05:02PM Sep 07, 2009 by Kris Wigfield in Insolvency  |  Comments[0]