HUNDREDS of York and North Yorkshire companies may have to renegotiate their bank loan terms following a landmark House of Lords ruling, a commercial lawyer has warned.

The ruling in the test case, National Westminster Bank V Spectrum Plus Ltd, overturned 25 years of standard banking practice, and will affect how banks can use debenture charges on limited company assets when overdrafts and other borrowing are agreed, said Mike Ward of York-based commercial lawyers Denison Till.

The ruling makes it far harder for banks to recover certain types of charges connected with borrowing if limited company customers become insolvent or go into administration.

Mr Ward, of Denison Till's corporate department, said: "Banks are now likely to put the strength and value of existing security arrangements under review. Businesses in York and North Yorkshire should expect a knock on their door and be ready to negotiate changes."

He said many current bank charges described as being fixed on book debts - monies owed to a business - will now be regarded as floating charges instead. Also, in most future cases, it will be impractical for banks to apply fixed charges to book debts.

From the banking industry's point of view, floating charges are far less desirable than fixed charges - levied on fixed-capital assets such as premises and machinery - because they have several disadvantages if the borrowing company becomes insolvent.

He said: "Banks may be inclined to lend less, demand greater security or both."

In the future, if they want to borrow companies may find that banks may ask directors to put in their own personal assets, such as their homes, to become personal guarantors of their company's debts.

"A key issue is control of cash flows and it is also likely that companies will have to consider alternatives to borrowing on overdraft such as invoice discounting or factoring," said Mr Ward.

"The positive side is that if you are a solid, profitable business this may be a good opportunity to shop around and get the best deal."

Updated: 10:49 Thursday, July 28, 2005