Business warned after ruling

A LANDMARK ruling in the British House of Lords could have a damagingaffect on both the cashflow of small businesses in Ireland and their ability to secure bank loans.

The ruling in last month’s Natwest v Spectrum case means banks will lose their right to a place at the front of the queue for repayment when businesses crash - making it more likely they will require additional security from small businesses in the loan process.

President of Association of Chartered Certified Accountants (ACCA) Ireland Gerard Loughnane said: “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.

“Until now, it has been accepted practice that banks have been able to take a fixed charge over companies’ book debts, on condition that the proceeds of those debts are paid into a designated bank account. But banks have also felt able to allow those companies to withdraw and generally make use of the proceeds of those book debts, without affecting the fixed charge.

“It is this permission for debtor companies to continue dealing with the proceeds of charged debts which has now been overruled by the House of Lords. The impact is likely to extend beyond Britain to Ireland.”

He believes banks are likely to react by imposing tighter restrictions on the use of the proceeds of charged debts.

“Accordingly, these cashflows will no longer be able to act as a potential source of working capital for small companies, which could worsen financial problems and conceivably tip some small firms over the edge.”

Unless strict controls are put in place, on how the proceeds of the book debts are used, a charge will be deemed ‘floating’ rather than fixed, and so will lose its status as a priority debt in insolvency, he said.

“Firms that have no option but to borrow from banks will just have to accept the stricter conditions.

“Bank borrowing may become more problematic for small businesses and so small and medium-sized enterprises may turn to other forms of finance to support their business.

“It could be that we will see greater recourse for small companies to factoring and leasing, and other alternatives.”