Extra time saves debt victims

By THIS IS MONEY
Updated: 19:00 EST, 31 August 2004

NEW laws aimed at taking the sting out of company bankruptcies seem to be working. Hundreds of small and medium-sized businesses, which are most at risk of going under, have taken advantage of the Enterprise Act, introduced last September.

Behind the changes is the aim of encouraging more people to set up in business by removing some of the stigma attached to those whose companies fail.

The law has made it easier and cheaper for companies that run into trouble to appoint an administrator, who will try to reorganise the business and prevent it from going bust. In administration, the management team often stays in place.

The alternative is liquidation, where the business is wound up, with the value of any assets distributed to its shareholders and creditors.

Alan Bloom, UK head of corporate restructuring at accountant Ernst & Young, says: 'The Government hoped that directors would be less fearful of the administration process, and that appears to be the case.'

Between September 2003 and June 2004, 973 companies went into administration - an increase of 102% on the previous year.

Nick Hood, senior partner at City-based business recovery expert Begbies Traynor, explains: 'Previously, any company wanting to go into administration had to hire a solicitor, a barrister and an insolvency expert to put together a report and have a full court hearing. It took weeks and cost up to £25,000.'

Now, directors can appoint an administratorcosting £5,000 at most, and file papers in court immediately. Hood says: 'Directors and their advisers are more willing to consider administration. Practitioners get to a business earlier, giving it a better chance of survival.'

Nine months ago, Dundee Football Club faced collapse. With £23m debts, a winding-up petition was threatened and banks had refused extra funding.

Chairman Bob Brennan, 47, admits: 'There is a stigma attached to a company in administration. It affects the way you are viewed by suppliers, employees and the public. But we had to do it - the club was losing £100,000 a week.' Dundee's debts have now been cut to £8m and it started the new football season out of administration.

Creditors of a liquidated company have far greater rights than those of a firm in administration. If a company goes into administration but still goes bust, all creditors are now treated equally and some may end up recovering less of the debt.