House of Lords blow to SME finances

Small firms' cash flow and ability to secure bank loans could be affected by a landmark House of Lords case.

In the case of Natwest v Spectrum, concerning insolvency law, the House of Lords ruled last month that banks that had secured their loans against the book debts of a company could not have access to the company’s assets until after employees and the costs of the administration had been paid and an amount ring-fenced for general unsecured creditors.

Essentially, this means that banks will lose their right to a place at the front of the queue for repayment when businesses go under. This in turn, experts believe, makes it likely banks will require additional security when loaning money to small businesses, possibly in the shape of personal guarantees from company directors or owners, such as their homes or cars.

‘The ruling makes it likely that banks will be stricter when drawing up the terms of loans and this could have a serious effect on small firms’ liquidity,’ explains John Davies, head of business law at the Association of Chartered Certified Accountants.

The House of Lords ruling also puts the assets of those who acted as guarantors to loans to businesses at greater risk. Banks may well seek to recoup loans by pursuing the assets of anyone who acted as a guarantor to the loan.

‘Many people who acted as guarantors on loans to businesses did so on the basis that the bank making the loan would have earlier access to the book debt on which the loan was secured,’ says Keith Stevens, a partner at accountancy firm Wilkins Kennedy. ‘This gave them a lot of confidence that if the company became insolvent the bank would never have to pursue them. This certainty is evaporating away.’

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