Chapter and verse

The Conservative party has waded into controversy by proposing a US-style Chapter 11 insolvency procedure. Although both sides of the debate agree that the insolvency profession could do with the attention, allowing companies to write off debts and continue to trade may not be the right way to go about it.

Critics of the reform, announced by party leader David Cameron in a speech to the CBI, question whether companies should be given the ability to enter into a UK Chapter 11 bankruptcy as often as needed through the life cycle of the business, and doubt that a board should be given powers to freeze payments to creditors and negotiate without an insolvency practitioner.

More fundamentally, one of the biggest questions is whether the board of a struggling company should be in charge of its restructuring, rather than an insolvency practitioner. Put another way, should the company that ran up the debts be given the authority to steer itself through a restructuring? And will the board have the necessary ‘turnaround’ skills?

Such powers could be seen as a ‘get-out-of-jail-free’ card for businesses, although, as the Conservatives have said: “We cannot, and should not, save all companies that fail.” But who decides which companies should be helped?

No point
James Money, director of restructuring at accountants Smith & Williamson, believes the current regime allows for “someone to keep an eye on what the directors are doing and ensuring that they are held accountable for what has happened to the company.”

He says the Conservative proposal is “a pointless idea”.

Support for the proposal comes from the insolvency practitioners’ body R3. “We need an insolvency regime that is fit for purpose both in fair and stormy economic times,” says R3 president Nick O’Reilly.

Gilbey Strub, managing director of the European High Yield Association, says, “Distressed companies wanting to avoid administration and survive currently pur sue an informal out-of-court restructuring, but this approach will no longer work given the growth in complexity of capital structures and diversity in lenders.”

However, CBI deputy director general John Cridland says that “Business would be interested in proposals that give companies breathing space when faced with unexpected liquidity problems.”