The changes now being brought in under the Enterprise Act 2002 affect, firstly, receivership and, secondly, the respective rights of different classes of creditors in formal insolvencies.

Taking receivership first, a bank or other lender of finance to a business will usually insist, as a condition of making the loan, on taking a charge over the business's assets. This charge can be either a "fixed" charge over specified assets or a "floating" charge over classes of assets, the actual identity of which are likely to be continually changing, like stocks and cash balances.

The charge will give the lender the right to take specified action should the borrower default on his obligations to repay the loan.

In practice, a bank will usually insist on being entitled to appoint a receiver or, more usually, an "administrative receiver" - a receiver who is appointed over the whole or substantially the whole of the company's property - in the event of the borrowing business defaulting on repayment of the loan.

The function of the receiver is effectively to take control of the business and to realise whatever assets are available in order to pay the lender the monies owed to it. The receiver is answerable only to his appointor.

In a receivership, therefore, the receiver is concerned solely to satisfy the financial demands of the lender and, by the time he has completed his work, there is often so little left that the business is no longer viable and has to go into liquidation.

Over the years many small firms have criticised bitterly lenders' decisions to send in receivers, arguing that a less self-centred approach to shortterm financial problems could have saved the businesses and the jobs.

Lose the right

Under the September changes, banks lose the right to appoint an administrative receiver under any floating charge which they take over borrowers' assets. Instead, banks will be entitled, in the case of the borrower's default, to appoint an "administrator".

The administrator's main objective will be - where possible - to save the company as a going concern.

To answer the criticism that the administration procedure has, itself, been inefficient in the past, the government is also streamlining the administration procedure to remove the need for court involvement, thus cutting costs, and to make it easier for companies to enter and leave administration.

Note, though, that the prohibition on the appointment of administrative receivers only applies to new loan agreements entered into after September 15; pre-existing agreements are not affected, so receivers may still be appointed in these cases.

The second big change relates to creditors' rights to payment in formal insolvencies.

At present, certain classes of creditors enjoy better rights than others. "Preferential" creditors include debts owed to the Inland Revenue and HM Customs & Excise in respect of unpaid income tax, VAT and national insurance contributions. Such debts must be paid after amounts secured by a fixed charge but before all other liabilities.

No longer preferential

As from September 15, debts owed to government departments in respect of income tax, NICs and VAT no longer count as "preferential". Other categories of preferential debts, including unpaid wages and pension contributions, are not affected.

The government's intention in abolishing Crown preference, which HM Treasury has estimated will cost it around £70 million per year, is that more assets are made available for trade creditors.

In respect of individual insolvencies, all monies which would in the past have gone to the Crown will be made available to trade creditors.

In the case of corporate insolvencies, the amount to be made available for trade creditors will be determined by reference to a set formula - where the assets available to floating charge holders exceed £10,000, 50% of the first £10,000 and then 20% of the rest should be made available to trade creditors.

So what will these changes mean for small businesses in practice? As regards the abolition of banks' right to appoint receivers, on the face of it this sounds like good news - even if a business falls behind with its repayments on a loan agreement, the worst that can happen is that its bank appoints an administrator rather than a receiver.

For companies that are only experiencing temporary working capital-related problems, their prospects of survival will no doubt improve.

But it should be remembered that an administrator will only be guided to keep the business going if it is viable to do so and where it is in creditors' interests to do so - where a business has no reasonable chance of survival, then it cannot expect the administrator to keep it going.

Next spring (2004), additional measures from the Enterprise Act are due to come into effect.

These will reduce the standard period of bankruptcy from three years to a maximum of one year and make it much easier for individuals to start up in business afresh after having failed.