Begbies Traynor is calling for local authorities to beware the impact of changing business rate rules on companies in financial difficulty.

Under new rules, payment of business rates has to be considered a priority ahead of administrators' costs and other creditors.

With rates potentially running into thousands of pounds, Begbies says this could make the difference between a company being able to continue to trade and be rescued or having to go into liquidation with attendant losses for owner, authority and creditors.

By contrast, if councils opt to allow payment of rates to be deferred, onward trading may be practicable, securing an income stream and saving jobs.

John Kelly, partner at Begbies Traynor in Birmingham, said: "The situation is complex and each case needs to be looked at on its own merits.

"Our concern is that recent changes make the default position one in which it may be more attractive to opt for liquidation than administration and this is counter to the intentions of the Enterprise Act 2002 which promotes a rescue culture. Going forward, when considering the options and deciding on the best solution for a business in difficulty, we must now consider the obligation to pay rates.

"This may tip the balance in favour of not trading a business and may mean that liquidation, with an associated redundancy programme, is the most appropriate remedy."

In recent years administrators have not been required to pay business rates until there was a change of occupier such as when a business has been sold and a new owner/occupier found. The associated reduction in financial pressure, it is claimed, can greatly assist in enabling financing or restructuring solutions to be found or in allowing a company to be sold as a going concern.

A judgment earlier this year effectively changed the situation, with major consequences for the thousands of companies that find themselves struggling to survive.

Trident Fashions, the successor of the Ciro Citterio Menswear clothes chain, was wound up in April 2005. Subsequent legal representations ultimately led to a High Court decision in March that non-domestic business rates must be treated as administration expenses and paid in priority over administrators' remuneration and other creditors.

Mr Kelly said: "Given that the decision is counter to the rescue culture we hope that the relevant section within the Insolvency Rules 1986 may at some point be adjusted. However, for now at least, this judgment sets the precedent for future cases, in effect meaning the ruling applies to all businesses encountering financial difficulty."

Depending on the type and scale of a business, business rate liabilities could represent a very considerable sum.

The quantum depends on a number of factors - including the nature of the business, location and size of property, and planned use. It is not uncommon for such rates to be calculated as a multiple of the rental values. If a business has no apparent means of payment then it can clearly sway the decision between opting for administration, with the intention of allowing onward trading or sale, and liquidation.

Mr Kelly says adding an additional layer of expense at a time when the business is already struggling will just encourage surrender of property leases as quickly as possible, particularly if premises are unoccupied.

"In short the ruling may force many more companies into liquidation when some of these might otherwise have been saved.

"If authorities follow the rules to the letter it could be to the detriment of all parties - but there are circumstances in which a more 'lenient' approach could be genuinely beneficial.

"It is really a matter of making individual commercial judgments. If the threat of having to pay the business rates is what forces a liquidation, the rates will remain unpaid as liquidators will simply disclaim leasehold properties and it may also result in secured creditors appointing their own Law of Property Act receiver over freehold properties.

"Alternatively, if deferring such payment offers a genuine opportunity to save a business, then not only can an authority reasonably expect outstanding debts to be paid but it can also maintain a source of future income.

"It will be interesting to see how different authorities respond over the coming months."