Why I still think importing Chapter 11 is a bad move

Joe

Where a whole industry requires restructuring, as in the US airlines, Chapter 11 becomes a menace. There are however good companies that have got into trouble as a result of poor management and have restructured successfully. I believe that Harley-Davidson is a good example of this. Not all bad, but not all good either.

Tory Lion

Fraser, I think you touched briefly on the point here and that is that they are going to take the good bits and omit the bad - I think that this is a promising policy and will bring a glimmer of hope and support to current and prospective small business owners.

I have an ever-increasing faith in Mr O by the day.

torylion.blogspot.com

Mark

If we had a airline sector full of bloated firms, hobbled by legacy costs and strong union power, as in the US, you're case against (a form of) chpt 11 in the UK would be stronger.

Fortunately we don't. Either in airlines or any other industry that I can think of. So the comparison fails.

Most UK based airlines are profitable, and those that aren't (silverjet?) would be too small to distort the market if granted 6 months trading in chpt 11 to secure more working capital. And this would only be forth coming if the underlying economics of the business were sound, but, for instance they'd raised too little cash at launch based on an oil price of $50 a barrel rather than $150.

Tim Lee

The reason we DON'T have an airline sector hobbled by legacy costs and strong union power is largely due to our lack of Chapter 11, Mark!

The problem with saying that any airlines we have that are in trouble are too small to distort the market misses two important points. Firstly, government legislates for the general case, not the specific case, and secondly, even a small airline can have a disproportionate effect on the limited number of routes it operates. A good case in point is Virgin Atlantic - in its early days it flew but one aircraft, on the London-New York route - one aircraft, small company, but it got BA in a tizz...

thomas

One wonders how lily-livered the current front bench of the tories are to make an outlandish tactical ploy of this nature.

Have they no faith in their ability to make their arguments stick, or have they no faith in the principles they supposedly stand to promote?

If this is a genuinely well-meaning proposal it raises questions about their competence, while if it is a cynical act it raises questions about their substance.

If it is strategically designed to appeal to their own economic constituency then the announcement is an admission of wavering support, while if it is intended to broaden the Cameroon church on wonders whether the method used was ever liable to be successful connect with voters.

I can only understand this move as a slapdash and flawed ripost to Mr Cable's ability to outmanoeuver Mr Osborne.

Richard Nabavi

By no means all the US companies which get into trouble and take advantage of the Chapter 11 provisions are bloated, badly managed, or cynically trying to avoid their obligations. Many small- to medium-sized companies have very successfully been protected by Chapter 11 after external events have temporarily damaged them. Even good companies can be hit by a lawsuit, a failure of a key customer, by technical problems which cause delays in launching a new product, by cancellation or delays in government procurement packages, etc, etc. Given time, some such companies can recover very well.

A good example I came across in the UK was a small software company which was a very small part of a consortium which successfully bid for a large defence contract. The project went badly wrong, because of the actions of a much large member of the consortium, but all the members of the consortium were sued on a 'joint and several' liability basis. I believe the small company - who believed there was no case for them to answer - went bust before the case even came to court, because of the huge legal fees.

So I think you are wrong, Fraser. There are many cases where the Chapter 11 mechanism works well in the US.

deminit

I wouldnt worry too much. like his approach on the NHS, noone seriously thinks it will survive into government do they?

TrevorH

"Protecting failing companies tends to prolong agony" ... I am not sure that is what Cameron is saying.

Remember Rolls Royce - it went bankrupt. It was bailed out by the govt. - Ted Heath.

The companies which might have benefited from RR going to the wall were either French or American - would this have been what we wanted.

When you have a credit crunch which is basically the result of govt incompetence both here, in Europe and across the Atlantic I think it behoves the govt to mitigate a disaster of its own making.

"Something like" Chapter 11 is not of course the same as Chapter 11. A British version may well be different.As I said earlier the devil is in the detail. I see no benefit is letting good companies be taken down with the bad.

Right now many thousands of British workers are worried about their future (and its not something we can blame on the Unions ala BL, though give them time) - let Cameron get on with thinking about ways to help them.

Diversity

I reckon that this is Cameron's more effective equivalent of Alastair Campbell's crazy fund-raising dinner party for Labour. Over the next two years, a good many Boards in British business will become worried about what happens to Directors in a bankruptcy. The feeling that Cameron is on their side should result in very satisfactory levels of donations to the Conservative cause.
In two years time, bankruptcy worries will be less to the forefront. It will be easy and statesmanlike to kick the issue into the long grass of a Commission.

TrevorH

Mr Nelson, you are right about C&A of course, but I am not sure it was replaced by Zara etc. it went west because of them. But replacing one retail store by another is not the point.

We may or we may not be better off because we have lost vast tracts of our manufacturing industry and the natural employment it brings to the traditional working class. I suspect we are worse off ... you only need to see the knife crime figures to see what mischief idle hands make.

But really I would rather we did not simply sit idly by whilst we lost even more to our competitors who might not be quite so pure in economic thought as you Mr Nelson.

And Mr Nelson I refer to 'idle hands' because the loss of manufacturing has not been matched by the necessary improvement in education, training and other suitable realistic job opportunities for young active male juveniles left bereft of a workplace they can respect.

TGF UKIP

Fraser, stick to your guns and don't be cowed by all the abuse directed your way. Hacks do have hides of leather after all - don't they?

Unfortunately for the self delusionists who still cling to the belief that Dave really is a conservative this proposal is merely part of a pattern.

It comes on top of Dave's proposal that director's bonuses should be linked to their company's social and charity work rather than profits and that the FSA should issue an annual social responsibility index so that companies could be judged against each other.

In keeping with this Dave has also proposed a social responsibility levy on companies (something on which you have previously commented I think, Fraser.)

The same Cameron and his apology for a Shadow Chancellor have also made a series of speeches on tax and spend none of which have gone anywhere near the supply side argument for tax cuts indeed, the word and concept of incentive is conspicuously missing - with one glaring exception.

In early April Dave delivered a speech in the City indicating that he was keen on rewarding the environmentally conscious through the tax system and therefore VAT on bicycles and other green purchases such as wind turbines and environmentally friendly light bulbs should be cut.

As the months roll by and 2010 comes ever closer, I sometimes wonder when the penny is going to drop that while the rhetoric might be diffferent and Dave might not bite his nails nor pick his nose, the social democratic policies are going to be pretty much the same.

Mark

Tim, you say
'The reason we DON'T have an airline sector hobbled by legacy costs and strong union power is largely due to our lack of Chapter 11, Mark!"

I'm struggling to think of a lame UK airline that in the last 5 years would have hobbled on under chapter 11 rather than going bust, and thereby distorted the market (rather than just destroying more shareholder value). If there were one please say.

Also " A good case in point is Virgin Atlantic - in its early days it flew but one aircraft, on the London-New York route - one aircraft, small company, but it got BA in a tizz..."
It might have got BA in a tizz but if it had needed short-term protection from creditors in the first year would it have distorted the market? I think not. Besides Branson funded it well.

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More generally, a system that provides protection from creditors can be abused. But if only short-term, so capped at say 6 months, I believe there would be a net positive result.

Putting a company into administration with a fire sale of assets, destroys value through the loss of reputation, good will, organisational competence etc all of which takes years to build.

By investing in chpt 11 businesses Warren Buffet and other value investors have shown there is underlying economic value in such businesses, and that they can subsequently out perform their peers. And not just by shedding debt or other unfair advantage. It is short sighted not to recycle them in tact where possible.

Nor does chpt 11 create moral hazard as usually the operating board is replaced. And the owner investors holding shares when the company enters chpt 11 also lose through sale or dilution.

Laissez faire capitalism should be red in tooth and claw. But those with oversight should fear the unintended consequences of a chpt 11 style system less than and the destruction of economic value that happens without it.

Especially in the midst of current financial rather than (as yet) economic down drafts.

TomTom

"When C&A closed down, "

C&A closed down in the UK but the Breninkmeyers still run their stores in Europe especially Germany

Tim Lee

Mark - one of the great things about the UK airline industry is the regulatory power of the CAA. Thanks to the Airline Licencing Act 1992, new start-ups have to prove adequate capitalisation for the the first two years of their life, which means, odd exceptions apart, early failures are rare. Virgin Atlantic therefore was well capitalised at start.

The point of this is, however, less to do with the requirement for new companies to need Ch11, and rather more the damage Ch11 does to the market in general. Let's assume that we had had Ch11 in Europe. We'd still have Sabena, Swissair, Laker, Air Europe, to name but four, and given that under Ch11, these companies could happily have continued trading (without feeling the immediate need to pay some of their costs, happy days!) - how on earth could a new good start - like Virgin, or easyJet, or Jet2 - have got anywhere? Hence my argument about market distortion.

The argument about changing management unfortunately rarely holds true in the US. One of the laughable things about the US airline scene is the number of senior people on merry-go-rounds between the majors in Ch11...

One either believes in the market or one doesn't. If one does, any mechanism that allows even short-term protectionism is to be feared as the top of a very slippery slope. We have now one of the best, most efficient airline industries in the world, comparing that with the shambles created by Ch11 in the US is enough to convince me of the argument against Ch11 in the UK.

BrianSJ

No mention of the role of the banking sector in this discussion. It is only recently that they have offered companies fixed-term loans that *might* not get pulled in if the company looks in any way risky. Given the state of the banking sector just now we need to be very vigilant about their behaviour.

Mark

Tim: Agree with much of what you say, and outside of anti-monopoly, consumer safety and this think the market should be left to get on with it.

But recognising that current insolvency practice is not optimal. And that we don't have the protectionism of the US, nor their legalistic culture I think the Uk is a different case. Besides a strict limit on duration the business could also be put under an administrator as a condition of protection so ousting management. And the legislation itself could have a sunset clause after 3 years so default position would be to scrap it if it does not prove its worth.