Banks and small businesses

Banks traditionally lent to UK small/medium sized companies against security which included a debenture charging all their assets.

The security afforded by such a debenture is far less today than it used to be. If a business failed, all recoveries (less fees) would usually have gone to the bank holding a debenture, often leaving nothing for ordinary creditors. In that scenario, banks more readily lent to small businesses than now – thereby stimulating the economy. Why do small companies now find it more difficult to obtain bank facilities?

Bankers (incorrectly) believed a debenture gave them a fixed charge over the company’s debts – now they have only a floating charge ranking behind employees and other preferential creditors. Charges over stock increasingly suffer from retention of title claims. Legislation has reinstated the priority of liquidation expenses and a pool of funds for unsecured creditors has to be set aside from floating charge assets.

The proposed new s 176ZB of the Insolvency Act 1986 will mean that recoveries from fraudulent trading, wrongful trading, transactions at an undervalue, voidable preferences and extortionate credit transactions will not be caught by a floating charge but pass to creditors generally.

Again, debenture holders (with some exceptions) no longer have the ability to appoint an administrative receiver of their choosing nor to prevent the making of an administration order. They will normally have the right to appoint an administrator, but he (unlike a receiver) will owe duties to all creditors (albeit aware of who chose him).

Has UK insolvency law swung too far against the banks which it used to protect?


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