Chapter 11-style insolvency rules?

Now that the Summer of gloom is in full swing, some business sectors are looking forward to a bumper Autumn!... Insolvency experts and turnaround specialists are gearing up for a surge in corporate debt problems which they expect will generate the biggest wave of company restructurings in decades. This could mean lots of fees. Lucky them!

Given the difficult credit conditions banks have largely held off calling in loans, focusing instead on dealing with write-offs from the subprime crisis. But any struggling business may soon hear the bank knocking on their door.

With the potential for a serious downturn questions are being asked as to whether European insolvency regimes are in a position to deal with the consequences. Especially since corporate structures are much more complex now than they were when the Enterprise Act 2002 was initially envisaged.

It is these aspects of the current system that prompted David Cameron to raise the issue at the CBI employers' group recently.

The answer, he suggested, was to borrow some of the best aspects of the US Chapter 11 bankruptcy regime - to save such companies from liquidation. Of course, he doesn't completely understand things as liquidation really means that there is no hope left for the business. I think going into administration is what he really meant!
He pointed out that many of the likely casualties would be "fundamentally sound" companies, he said, but they would not have the "breathing space" to restructure and keep their businesses alive.

His comments have sparked a fierce debate between supporters of the US approach and defenders of the English system, introduced in the Enterprise Act 2002. The Enterprise Act works if more than 75 per cent of the creditors agree and do a scheme or pre-packaged restructuring but in the abscence of full agreement problems can arise.

When it works well, it can be cheaper and faster than the adversarial Chapter 11 approach, which is under the direct control of the courts.

Advocates of change, however, argue that the 2002 regime has not been fully tested in the sort of market conditions now seen across the advanced economies. Some predict it will buckle when the pressure builds and that a more formal legal framework is needed to provide stability, predictability and efficiency.

To many in Europe, the US system is seen as one that protects inefficient companies by allowing them to offload their commitments under court protection and emerge as stronger competitors who can undermine more efficient businesses that have not been able to do the same. The most obvious example of this is in the airline industry where large US airlines have been allowed to go into chapter 11 when perhaps they should have really been left to wither.

In conclusion, it is paramount that any system works well. Chaotic attempts at restructuring large UK corporates could do untold damage to UK plc as a place to do business.

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