Cameron's left-wing chapter

Alex R

We are already seeing companies, especially in the retail sector, abuse insolvency laws to rationalise their holdings and dump poor performing stores. This last thing we need to do assist corporation is reneging on their responsibilities.

TrevorH

Cameron actually says ...
"This will "give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch," he will say. "This change will ensure that fewer good companies end up in liquidation and less people lose their jobs through no fault of their own. But of course, we cannot, and should not, save all companies that fail."

The devil or the benefit would be in the detail, under Chapter 11 creditors can vote not to accept a solution. I am a right wing Tory - but you sound like the type of thoughtless immature young gimboid who wants to see people thrown on the dole.

The kind of dipstick that gives the Tory party a bad name.

Just in case you haven't noticed there is an economic crisis on. Yes I tell you what - lets all line up and wave British industry and commerce goodbye.

Empedocles

I don't see that it can be all that lefty, when one of the worst hit groups in the US Chapter 11 cases are the Unions, who find labour contracts being summarily torn up as part of the reorganisation plan...

Mark

Schumpeter's creative destruction is required if companies and in turn an economy are to adapt. But that does not have to happen through insolvency, fire sale and mass redundancy. Particularly where the underlying economics of the business are sound, but cash-flow and ability to service debt is temporarily not.

There is a lot of space for pragmatic policies between the 'let them crash and burn' extreme and the other where uneconomic businesses (e.g. old style airlines) could suck indefinitely on the government subsidy teat.

Any analysis that does not recognise this is flawed.

David

Small businesses seem to be welcoming this, so the idea that it allows big companies to prevent them from succeeding seems off base.

I think your analysis is highly flawed in this case, Fraser. Particularly the idea that this is extremely left wing.

Tony Colvin

TrevorH has it absolutely right. It is in the national interest to save companies that have a long-term future but are suffering the results of bad management or bad luck or an over-valued exchange rate. Thatcher and her children Blair and Brown, supported by you, have allowed Britain to become de-industrialised. We are now paying the cost of not making things.

Silent Hunter

I have to say that I agree with both Tony Colvin & TrevorH.

Short term crises caused by bloated banks imposing ludicrous sanctions on small business should not automatically result in closure and the attendant redundancies which then put pressure on the public purse in benefits payments.
Better that the company is helped through a short term cashflow problem than put yet more people on the dole.
Sorry Fraser but the Tories at last, seem to be looking beyond the '5 year political cycle' which this dreadfully corrupt New Labour Government is incapable of.

Progressive

I agree with Trevor H and Tony. David Cameron is showing his maturity in shunning neo-liberals like you and moving behind France and Germany who understand governments hve to take care of their companies when they need it. You can bet they wont be shedding jobs as fast as British companies in this downturn. If Brown was too beholden to Thatcher it's good to see Cameron going his own way.

Chris SE9

No doubt all the companies who are donors to the Tory party are rubbing their hands with glee. Pay back time.

Ed

Fraser, with the greatest respect, you've absolutely lost the plot this time.

Chapter 11, used carefully, is a perfectly reasonable business turnaround tool. Businesses become insolvent for all sorts of reasons. It's ridiculous to assume it's "always" because they're badly run. What is the benefit to anybody of having a viable business liquidated just because one errant creditor decides to flex its muscles when all the others have reached a deal?

Fraser Nelson

Gents, please don't get me wrong. David, I don't say it's "extremely" left wing - I just think it's significant that this (like health) is an area where the Tories are attacking Labour from the left. Ed I'm not saying bankrupt companies are "always" badly run. It's the unintended consequences of Chapter 11 that pose the danger to the economy: the Americans didn't intend that WorldCom would pull the scam it did. Just as Cameron doesn't intend for badly run companies to escape collapse. But the law of unintended consequneces is one Westminster always passes.

simon hb

Erm... wouldn't the left-wing response be to nationalise the failing company rather than give the private sector a chance to sort itself out?

Hugh

Fraser: My fear is that the banks and insolvency practitioners just get overwhelmed by the whirlwind of debt, pension liabilities and reduced sales Brown has caused.
A Chapter 11 equivalent may be essential to slow the process of our remaining viable businesses being snapped up by others in fire sales.

Clive

Fraser it is no good saying such a system 'can' be abused and therefore is bad. Any system can be abused and so made worthless or even dangerous.

It is indeed all in the detail, and making it fairly robustly abuse proof is what any competent government should be able to do ( although not the unintended consequence kings in office at the moment).

This is a sensible suggestion and you have knee jerked into action.

David

"I just think it's significant that this (like health) is an area where the Tories are attacking Labour from the left"

So? We attack the BNP from the left too. This idea that we must always be to the right of Labour is just a straightjacket preventing free thinking and coming up with novel ideas to solve the problems we face.

Tim Lee

Clive - I agree in essence with your comment about government having a duty to make sure that the systems it sets up are not subject to abuse. But in the case of Chapter 11, it is clear from the US airline experience (an industry about which I have deep knowledge) that the system can be abused as designed. A once world beating industry is now mired in poor competitiveness, poor customer service, massive over capacity, massive over unionisation and technical bankruptcy - all because the politicos cannot stomach the failure of a major carrier - even though that is what the industry is crying out for.

One cannot have new green shoots, with new dynamic businesses growing up if one continues to cultivate the weeds. As for unemployment, I am surprised to read on here of people professing to be right wing whilst advocating a "protect jobs first" policy for the UK economy. Surely we have learned by now that such policies lead to higher unemployment in the long run? In a good dynamic entrepreneurial economy, new companies can grow to create new jobs, old Chapter 11 protected half-dead behemouths stifle new companies and new jobs.

Additionally - how many more civil servants do we need to pay for to police these systems and controls?

As a good old fashioned Tory, I believe passionately in small government, low taxation, free trade and free markets. Anything that acts to protect companies from the full force of the market reeks to me of protectionism at its very worst. As for the "Chapter 11 provides a short term haven for a fundamentally solid business in temporary trouble" argument - a good business can get money commercially (I have been in this position as an entrepreneur) and if it really can't, questions should be asked how good the business really is....

"You can't buck the market". How quickly we forget the lady's lessons, to our peril.

Sir Buffy de Vere

The answer is very simple. Nobody's told Cameron that in UK law we have had something called Administration since the Insolvency Act 1986. It's the UK version of Chapter 11.

Scott

A long time ago in a political climate far far away Sir Kenneth Cork chaired a committee on INsolvency Law and Practice. Sir Kenneth was conscious that the then applicable system of business insolvency was not working effectively. Among other things he noted that insolvency law should provide "a means for the preservation of vaible commercial enterprises capable of making a useful contribution to the economic life of the country" (para 198 (j), Cmnd 8558, 1982). To that end his committee proposed the introduction of something known as administration. This - a collective process for all creditors - would place a moratorium on enforcement proceedings against the company and give it a chance to get back on its feet. Cork envisaged that this, coupled with a reduction in the power of floating charge holders (typically the big banks who have loaned to companies) would aid corporate rescue, for the floating charge benefited one already powerful creditor at the expense of lots of little creditors in the distribution of assets, and also entitled the big creditor to replace the management of a company with its own appointee - whose duties were owed not to the general body of creditors, but to the big creditor. Administration, as a collective process, would aid corporate rescue, avoid the potential unfairnesses to the many creditors at the expense of one big creditor - emphasising the principle paritas creditorem (all creditors should be treated equally - including small businesses). The key element though in either process was the removal of incompetent managers. While the management was removed it could be investigated - to examine the reasons for failure.
The Thatcher government introduced administration Mr Nelson (so I am slightly memused as to where you're coming from on this) - but did not reduce the power of the floating charge holder (thereby undermining the efficacy of the process). Accordingly with the Insolvency ACts 1985 and 1986 there was no real change in corporate insolvency culture. Throughout the time after the 1986 Act the courts (in Scotland) attempted to redress the balance in favour of smaller creditors. While violating general legal principles small creditors started winning small victories over the floating charge holder. But the general rules remained. Until 2003. That year, the Enterprise Act 2002 came into force. This ACt - promoted by the much maligned Peter MAndelson sought to redress the problems of 1986. This restricted the power of the floating charge holder (removing the power to put businesses into receivership and forcing new floating charge holders to put companies into administration if they sought to protect their interests. It sought to make administratione easier (albeit using legislation incomprehensible even to afficionados (Sir Roy Goode, doyen of commercial law professors described dealing with the legislation in his book Principles of Corporate INsolvency "To read the amended Insolvency ACt 1986 it no longer suffices to be a lawyer; it is necessary to become a physical geogrpaher in order to find one's way arpound provisions which are randomly dispersed among the body of the Act, the bizarrely numbered Schedules A1 and B1 and the Insolvency Rules, with seemingly no logic in the distribution nor any conception that it might be useful if all provisions dealing with the same subject were brought together in clearly stated requirements. ... [T]hose who enjoy finding their way round mzaes might give Hampton Court a miss and try their hands at tracking down the meaning of "Hire-purchase agreement" in paragraph 43 (3). All that is required is perseverance and a passion for concentric circles.")

Contrary to Cork's original recommendations the 2002 Act provided that administration could be entered into without court control (an odd tendency in British debt enforcement procedures) - allowing floating charge holders or directors to put the company into administration without the costs of court involvement.

Early statistical studies indicate that the new regime is encouraging increased use of the rescue provisions. They seem to be bedding in well, and while the legislation could be better drafted and better structured, it seems to be achieving its objective.
So what prompted Cameron to argue that Britain needs a corporate rescue regime - to give businesses breating space to allow restructuring and to protect jobs. "In America they have Chapter 11 which is a stay of execution," he told the Today programme. "Instead of companies going straight into liquidation and having to lay off staff, they get a stay of execution and they can be restructured to try to save the business, to try to save the jobs. Now that doesn't actually cost taxpayers money, but at a time when we've got economic difficulty and at a time when companies may get into these sorts of problems, we ought to be taking action now, showing leadership now to try to save those jobs."

Well, we have that. It's called administration - where businesses are given one year's breathing space to restructure and attempt to save the company - by barring creditors from enforcing debts against the debtor business. The expenses of administration are borne by the company - and given a preference over various other creditors (meaning the taxpayer doesn't pay). His party brought it in, and the other lot adapted it. So, what on earth is he talking about?
Anyway, this is apparently how modern politics works. Something must be done to address this awful problem. IN this case that something that must be done is to be virtually identical to the something that has already been done. When the something that must be done is pronounced earnestly (and greeted with applause by people who should know better) with a veritable plethora of soundbites that sound good to the general populace - pro-business, pro-rescue, pro-employee - the lack of substantive content is missed in the general swell of support. Why are people taken in by this? And why was Cameron not questioned by the journos on the fact that we have this system that he was advocating virtually in place at the moment? And how can the likes of Mr Nelson write critical articles that appear oblivious to our current legal position.

Frank Pulley

Bang to rights Fraser!

Barry Cameron

I wrote to the Major government during the last very bad recession
arguing for a Chapter 11 measure. i thought it would save jobs and many companies in cash flow difficulties.
The Minister rejected my idea but it was clear from the civil service jargon that the real objection was that the Banks would not get their money back quickly enough. Short- termism. Also there was was no insight or care for the unsecured creditor, employee and how business really works.

David Cameron ideas are spot on and full of understanding of how bad things are and the future.

Scott

The reforms implemented by the Enterprise Act 2002, in removing the power of new floating charge holders (typically big banks who had a security over the entire asset base of the debtor company to secure the indebtedness due) to appoint receivers (who had as a function the repayment of the floating charge holder) removes some of the control of the big banks. True the reforms allow the floating charge holders to appoint administrators - but the appointment (1) replaces the management of a failing company; (2) puts a moratorium on debt enforcement for a year (which can be extended on application); and (3) means the person put in place to manage (the administrator) owes duties to every creditor rather than just the big bank.

Now, Cameron's ideas are virtually identical to what the law is at the moment. Could he explain what is wrong with the current law that his proposals would remedy? Or perhaps he doesn't understand the current law (brought into force during the past 5 years), and that it is broadly similar to his proposals. Perhaps he needs to be asked about this - because his credibility as a policy formulator is dependent on responding to genuine systemic problems, rather than policy making by soundbite, where substance is lacking.