A LANDMARK House of Lords insolvency law ruling could have a damaging effect on small businesses and their ability to secure loans from high street lenders, the Association of Chartered Certified Accountants has warned.

The ruling in the Natwest v Spectrum case will mean that banks will lose their right to a place at the front of the queue for repayment when businesses crash.

The move could see banks asking for additional security from small businesses in the loan process, including personal guarantees from company directors or owners, such as their homes or cars.

Regional spokesman Alan Hynd said: "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 the status of the fixed charge being affected. 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.

"Banks are therefore 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 money problems and conceivably tip many small firms over the edge."

Unless strict controls are placed on how the proceeds of the book debts are used, a charge will be deemed to be a "floating" rather than a fixed charge, and will therefore lose its status as a priority debt in insolvency.

Mr Hynd said: "Small and medium-sized enterprises may turn to other, alternative forms of finance to support their business. It could be that we will see greater recourse for small companies to factoring and leasing."