The British insolvency code is under attack from small to medium sized business owners. There are elements of the code that said owners find quite biased. Here, in a nutshell, we will expose a few of the issues to stimulate further research.

Economist contend that when secured creditors hold all, or nearly all, control rights for a company in distress, then it creates an non-objective tendency towards liquidation. It is further argued that small and multi-party creditors are difficult to rescue when insolvency standards are not based with collective action. It is proposed that they in turn will not succeed in realizing the value of collective action, and thereby panic themselves into a ‘creditor’s run’ mentality.

‘Lazy banks’ are created as a result of heavy collateral lending in the UK banking system. With such collateral on the line, the banks fail to monitor the vitality of businesses until they are in financial distress. Lenders therefore possess superior bargaining positions in terms of working out agreements. This often prevents valuable renegotiations from taking place. On a more positive note, companies are often spared mandatory insolvency proceedings if they replace management and make substantial, yet partial repayments of principal.

Unlike in the US, the British insolvency code is operated almost entirely outside of the court system. The bank’s powers are seldom questioned or challenged. It is prevalently argued that this undisputed control exerted by the banking system hinders competition in the general marketplace.

The most common method of recuperation before forced insolvency utilized by business owners and individuals in financial distress are CVAs and IVAs. CVAs (Company Voluntary Arrangements) allow a company to settle their debts. Current directors remain in control of the business. Creditors favor CVAs because they receive more with these than a company that goes under. They ease cash flow issues and stop court actions.

Individual Voluntary Arrangements (IVAs) likewise allow individuals to relax by stopping chasing letters and court actions. They also freeze interest from accruing on debts. Both CVAs and IVAs must have cooperation from 75% or more of a company’s or individual’s creditors.