UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".