Proposed European legislation could risk UK firms’ solvency

A number of British firms could be required to seek bankruptcy advice if proposed European Commission regulations are passed.

While the UK government has the ability to opt out of the legislation, there is a risk that the new rules could scupper bids to rescue some companies from the brink, it has been claimed.

European and British ministers are mulling over a proposal that would allow courts anywhere in the European Union the power to freeze funds in British enterprises' bank accounts without any notice whatsoever.

According to insolvency practitioners' trade body R3, the potential implications of such a move could be far-reaching.

It noted that the UK has a strong reputation for being particularly good at helping to save businesses from the brink of termination.

However, this could be put at risk by the proposed European Account Preservation Order (EAPO), the organisation claimed.

R3 noted that the possibility of British firms having their cash flow restricted just when they need it most could be a major blow to their chances of staying afloat.

If passed, the new measure would have none of the protections considered crucial to similar asset-freezing procedures in English law.

According to R3 president Frances Coulson, a decision in favour of the legislation could cause difficulties for those firms receiving insolvency advice.

"The new measure would drive a coach and horses through attempts to rescue businesses formally or informally," she said.

"Cash flow is critical during delicate rescue work. Removing access to substantial funds without notice gives a single creditor the right to jeopardise hopes of business preservation, harming creditors as a whole."

R3 noted that the legislation is designed to stop rogue directors hiding or removing assets, effectively protecting them from creditors who are owed money.

However, the way the EAPO is drawn up leaves it open to exploitation that could see one creditor benefit at the expense of the many.

While freezing a bank account would effectively ring-fence money for the creditor in question and could almost guarantee they receive a return, it could act as the final nail in the coffin for a business that might otherwise have been saved.

Such situations would mean that the firm would be unlikely to be able to fulfil its commitments to all its creditors, meaning that some could miss out entirely, while a potentially viable business goes to the wall unnecessarily.

Furthermore, the loose drafting of the bill also means that assets could be frozen for a range of reasons not related to a risk to that capital.

R3 explained that there is a risk that the orders could be routinely granted in cross-border debt recovery cases, posing a significant risk to UK firms battling to stay afloat.

"The UK is seen as an international leader in business rescue, benefiting creditors who usually receive higher returns in rescue than terminal procedures," Ms Coulson continued.

"If EAPOs are supposed to protect assets from dodgy directors, the new regulation should reflect this objective. As they stand, the proposals are dangerous and draconian."

Meanwhile, R3 has predicted there could be a high number of insolvencies later this month, when many retailers will be asked to pay their quarterly rent balances.