A ruling by Britain's highest court on Thursday cut banks' expectations for payouts from future bankruptcies, raising the prospect directors may have to put their own assets on the line to raise finance, lawyers say. Banks have previously assumed that debt secured on money owed to their clients - so-called receivables - ranks higher than other credit, including money owed to the Government, employees, administrators and unsecured creditors.
But the House of Lords ruled that money raised on receivables actually ranks lower in the bankruptcy pecking order, meaning banks in future may require new lending to be additionally secured on the assets of company directors.
"Banks may want extra security, especially lending to small and medium-sized enterprises, for example taking additional, personal security from directors," said Jennifer Marshall, a senior associate in the insolvency and restructuring group at law firm Allen & Overy.
"This is hardly in keeping with the entrepreneurial culture the government is trying to foster."
The ruling also applies retrospectively to a backlog of over 500 bankruptcies queued in limbo by the case between National Westminster Bank Plc, part of the Royal Bank of Scotland, versus Spectrum Plus Ltd.