Failed firms bank on the Lords

Small business owners are eagerly awaiting a landmark decision from the House of Lords that will determine whether entrepreneurs whose companies have folded need to pay their bank thousands of pounds.

The case of Natwest V Spectrum will set a new precedent for all those small businesses who declared bankruptcy since June 2001.

It will also decide whether rulings from the Lords should only apply prospectively rather than retrospectively.

At the centre of the case, the Lords will have to decide whether banks can claim a “fixed charge” on assets, such as stock and payments owed by customers, before the creditors do so if the company cannot pay its bills.

This means banks will either continue to control book debts and assets, or the Lords may decide to hand down a “floating charge” to replace the current regime.

According to the Daily Telegraph, defeat for the banks ensures they are expected to call in the personal guarantees given by directors to make up the financial shortfall.

Potentially this puts owner managers at risk from losing their car, property or any other significant assets ahead of action from the creditors, the Inland Revenue and Customs & Excise.

Yet the Revenue has declared it will only seek to claim debts back from failed businesses to June 2001 – the month when uncertainty emerged following a Privy Council decision.

Since the ambiguity, KPMG has said that banks have amended their documentation to avoid falling into the same uncertain situation, but have lost the “security” they once had.

It is understood that almost £200m has been tied up in liquidator’s accounts, since the ruling by the Privy Council.

Now it is expected that given the importance of the case, the law lords will delay their conclusion even when they have reached the end of the four-day trial.

The House of Lords has also chosen to highlight the importance of the case by selecting seven lords, instead of the conventional five.

Furthermore, the importance of Natwest V Spectrum is underlined by another potential debate on whether court rulings from the Lords should hereafter be enforced prospectively.

All entrepreneurs should be aware that a loss for the banking industry would free up more money to pay the administrator, as well as delivering more capital to fund recovery.


27th April 2005

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