Attempts to rescue troubled companies and save jobs are facing sabotage by a new breed of creditor with a vested interest in the firms' liquidation. New types of financial instruments are available on the open market and their owners make money when the company concerned is dead rather than alive.


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That means modern-day creditors' meetings may contain a 'fifth column' with no interest in keeping the business as a going concern.
This undermines efforts, which started with the 1986 Insolvency Act and were intensified by the 2004 Enterprise Act, to encourage a culture of rescue for troubled firms.

At the heart of concerns is the credit default swap - a type of 'insurance-policy' on a piece of lending, usually issued by a bank and which can be traded on the open market.

In any attempt to restructure a troubled company, creditors will have to share some of the pain in terms of reduced or delayed repayment of what they are owed. But a CDS holder has a vested interest in the firm going bust, because this will trigger full repayment of what is owed under the terms of the CDS.

'There are far more sophisticated financial arrangements in place than the last time there was a wave of corporate insolvencies,' said Patricia Godfrey, president of R3, the restructuringand insolvency professionals-trade body. 'We've moved away from conventional creditors, usually a bank or a group of banks.'

Alongside the CDS, said Godfrey, are more straightforward debt securities that give creditors first refusal of a company's assets in the event of a liquidation. These can give creditors an incentive to block a rescue.

Ultimately, she said, these types of creditors may have to be bought out by other creditors to stop them blocking a rescue.

Mike Rollings, of accountant Baker Tilly and a member of R3's governing council, said: 'The arrangements in today's market mean you are not as sure as in the past as to where every creditor is coming from.'

At leading City law firm Jones Day, restructuring head Adam Plainer said: 'Restructurings are more complex due to the number of different holders of debt, some of whom are not readily identifiable and some of whom, because of the proliferation of credit default swaps, may have an interest in the collapse of companies rather than their rescue.'

These are the latest so-called toxic securities to have come to light recently. Financial markets round the world have gyrated as concerns have risen over the low real value of billions of pounds' of poor-quality debts that were packed up and sold to financial institutions.

Best known of these are the marketable securities based on bundles of 'sub-prime mortgages' lent to Americans with bad credit histories.

Now, it emerges that investors have been invited to take a gamble on firms going bust - and been given the clout, in a creditors' meeting, to help make it happen.

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