The Free Enterprise Group (FEG) of Tory MPs, believes the proposed changes, including a bankruptcy protection process similar to the US Chapter 11, would help to protect smaller businesses.

Westdale Printing Group managing director Alan Westbury said: "Sometimes profitable companies do run out of cash, and there are some circumstances where protection from creditors is a good idea. I have had a couple of customers who have entered into Company Voluntary Arrangements (CVA), one of which eventually paid me everything that was owed."

Print Express London owner Michael Moradian added: "If bringing in bankruptcy protection means giving businesses the time to work through their problems and restructure in order to pay off their debts, then that is fine."

Martin Smith, chief executive of direct marketing group the Involve Marketing Partnership, which placed two businesses into administration earlier this week (see page 3) said that a period of bankruptcy protection could have given the group "the breathing space" it needed to turn the businesses around. 

Conservative MP and co-author of the report George Eustice said: "Often when a business goes into administration all decisions are taken away from the directors, a random administrator is appointed and the directors give up and become demoralised. The US system allows the debtor to remain in control, albeit with conditions attached."

The think-tank report claims banks currently have disproportionate power over their small business customers due to abuse of the 1925 Law of Property Act (LPA). Under the Act, banks can appoint an LPA receiver over a legal charge, an appointment that is unregulated – and which is guided largely by contractual terms and conditions.

Data published by the Council for Mortgage Lenders showed that the number of receivers instructed under the LPA Act jumped from under 1,000 in the first quarter of 2008 to 4,500 in the first quarter of 2009.

Eustice added: "Banks have contractually extended their rights via the terms and conditions of mortgage deeds and no SME would be able to negotiate a variation to those terms; banks are effectively writing the law in this area."