Time for New Priorities? Make it hurt the Banks more to push the Liquidiser Button.

The government needs to bring in emergency (possibly temporary) legislation to ensure that businesses are not unnecessarily placed into liquidation and to strengthen the Administration procedures to ensure that the greater economic public good is the primary consideration in these desperate times.

The new structure needs to ensure that the administrator will see the bank as a help, not as a hindrance to getting the business going again. The bank, too easily as usually the creditor at the top of the pile (through secured fixed assets and floating charges), currently has the driving seat in the Administration.

While the Administrator usually has an obligation to all creditors, the reality has been (and need not be in the future) that necessarily the decisions and attitude of the bank are the major determining factors as to whether the company keeps going or not.

The past short-termism and short-patience of the banks and their perceived obligation to their shareholders (who are, these days, quite a different bunch - you and me) will usually push a business under rather than wait patiently for survival and a better and more full repayment of the initial debt through proper agreed restructuring with creditors.

If there is an Administrative Receivership (when the bank is effectively in complete control of what happens) the situation will be driven by the need to realise the debt to the bank, full stop. There are many companies which will be in danger over the next six months whose loans were sorted well before September 2003 and will not be going into Administration, but rather Administrative receivership, because the bank holds a loan with the business secured by a (now outlawed) floating charge created before September 2003.

It was foresight by this government that they took action in this regard by banning Floating Charges from 2003 - this recession would have been made deeper had they been as widespread.

The reason we need to act now is that the behaviour of the banks in the last few months has made it clear that they seem unable to act responsibly even where their very existence has been guaranteed by State intervention (or rather, the intervention of the British public) designed to ensure the wider economic and social public good by their continued existence. In addition to the recapitalisation, the public (i.e. you and me) have taken on personal tax debt well into the future in order to guarantee bank lending generally and between each other.

The public - and SMEs - should now get some quo for the quid. That is what fairness demands. We temporarily at least need to suspend the present rules which govern who gets what when a business goes under to encourage the banks not to push for liquidation (or even administration) in the first place.

Not only do they need to be stopped from putting undue credit pressure on SMEs that might tip a solid business down a slippery slope into administration and liquidation (and their sole-trader and partnership equivalents), but where a business has got into difficulties it has to be made far more difficult to put the business into actual liquidation.

The Administration and Liquidation buttons need to be made far more risky for the banks to press. We need to make it a last resort by making that step hurt the banks more. It seems to be the only language they understand at the moment. They are behaving like teenagers and need the firm slap of government to bring them round to reality.

The answer is simple: secured creditors (usually the bank) must be relegated below the employees of the company in the pecking order, and the employees should be paid out to first in all circumstances. The workers must go from being Preferred Creditors to Secured Creditors.

The new top and legally secured creditors who would be paid first in all circumstances (even before the costs of liquidation) would then be the employees. Fairness now demands that. We have bailed out the banks and will be paying for some years so to do, so they have to get down the pecking order now.

The employees and their representatives will then have as important a chair (or perhaps an even more important chair) at the table of the administrator than the banks.

But to ensure that the medicine works, that secured status must be strong and serious. Any liquidation must be required to pay to all employees who have worked at the business for 12 months and who are not directors or shareholders (except by way of workers' incentive shareholding) 3 months' salary and all owed holiday pay. Employees with less than 12 months can be paid pro-rata per month divided by 12.

Only after that has been done shall the banks have recourse to moneys realised from their secured fixed assets or floating charges.

Furthermore, it may be possible to allow an administrator to apply to the government for an order that the (now lower ranked) secured creditors rank equally with other creditors, should the administrator be aware that the failure to pay other non-secured creditors might itself lead to further other business failures (thereby stopping a multiplier effect).

After all, why should 'Warley Widgets Ltd' go completely under for a debt owed to it by 'Going Under Ltd' which debt forms only a small proportion of the debt which will be repayable to 'Big Bank PLC' because of a liquidation effectively enforced by 'Big Bank PLC'? An Administrator (as an officer of the court with wider obligations) must be able to make strategically important decisions like this which take into account the wider business good.

Indeed, Adminstrators need to be required to work with each other far better for wider, more strategic administration structures that cover more than one business.

The threat of generally bringing in the employees as secured creditors for 3 months pay will not only (if the worse comes to the worse) make the recession less toxic for employees finding themselves out of work, but may also make the bank work harder to make the business work, and to take a longer-term view.

It may be that these emergency recession structures can be lifted in better times in order to ensure that future lending is well securitised (an irony) and with certainty. Or perhaps they may form the basis of a new future for how we treat 'business deaths' or 'near deaths' in the UK that allows for better, strategic, longer-term decisions to be made.

Serious times call for serious measures and these have to be considered for immediate implementation. Had the Banks themselves (both those recapitalised and those whose lending is guaranteed by the state by massive state intervention - all of them, including Barclays) recognised that they owed a duty of care to business in general and the wider economic good as the recession hit, such serious measures may not have been needed.

We live in interesting and distressing times... Cometh the hour, cometh the man - we hope that it will be Lord Mandelson.

David Bailey is Director of the Birmingham Business School, and John Clancy runs two SMEs including MediaFutureAlerts.com