£1bn bankruptcy windfall for banks

BANKS are poised for a multi-million pound bonanza, thanks to a new insolvency regime that is aimed at helping troubled companies.

Senior insolvency practitioners believe that the new rules, which come into force in three weeks, will actually pour more money into creditor banks.

'This is a major windfall for them,' said Keith Goodman, former president of the Insolvency Practitioners' Association. 'Over the coming years it could be worth a billion pounds or more.'

The Department of Trade & Industry is aware of the loophole, but told Financial Mail there was no legally safe way of closing it.

Under the changes, Inland Revenue and Customs & Excise will lose their 'preferential' status and have to queue up for any available money alongside ordinary creditors when a firm goes bust. Although banks will also lose their preferential status, this will apply only to future lending contracts.

Those written before September 15 will remain in force with the banks' privileges intact. And because they will no longer have to compete with the Revenue and Customs for first pick of any assets, the banks will be even more likely to be repaid in full.

One senior insolvency figure said there were suspicions that some banks may have held off putting companies into receivership over the past few months, knowing they will get a better deal after September 15.

He said: 'Corporate bankruptcy figures in England and Wales for the second quarter of this year were down 6.9% compared with 2002, even though personal bankruptcies were up 14%.

'At the time, this was attributed to a greater willingness by banks to help companies through bad times. A cynic might wonder if there wasn't a more sinister motive in one or two cases.'

The new rules are designed both to give smaller creditors a fairer deal and to encourage all creditors to help companies through hard times rather than pull the plug.

Ultimately, as companies merge, close, change their bankers or simply renegotiate their borrowing arrangements, the number of pre-September 15 contracts will dwindle into insignificance. But, as Goodman pointed out, this process could take many years.

Last week's collapse of the retailer PowerHouse was seen as a warning of more insolvencies to come as the economy enters choppier waters.

Autumn traditionally sees a rise in the number of companies acknowledging financial problems and trying to agree deals with creditors.

By coincidence, September 15 is the date for a key meeting of bondholders in troubled tour operator MyTravel.

They have been asked to hold off demanding repayment of the loans to help the company through its difficulties.