If Britain had wanted to adopt America’s Chapter 11 insolvency regime it would have incorporated it in the Enterprise Act of 2002. Instead, when the bankruptcy process was changed we took the best parts of the US system and rejected the rest.


Now that we are heading towards a recession that will increase insolvencies the regime will be tested but that does not mean the Conservative party is right in calling for Chapter 11 to be imported to Britain.

The long-standing US law allows insolvent companies to bring in new capital that old creditors cannot touch. But it leaves the old management – whether incompetent or crooked – in charge and free to burn through the new money as quickly as it wasted the old.

Perhaps if new financiers are daft enough to lend to proven losers they should be allowed to, but the old creditors deserve to be protected.

Chapter 11 allows companies to rip up agreements such as employment contracts and leases and to walk away from pension liabilities. Employers can cut wages with little protection for workers.

In practice all big decisions have to be approved by special bankruptcy courts, but the process is slow and expensive. Shareholders – who have probably lost everything anyway – must give consent but old creditors have no say even though it is their money that is being diluted. Rather than giving troubled companies a breathing space it allows them to suffocate slowly.

The UK administration process allows many of those benefits but imposes external managers who can make a business efficient and viable, thus retaining jobs and providing a payment for creditors.

With British business sliding into economic slowdown there is no choice but to use the existing insolvency processes. Perhaps after that there can be a new change but we should not assume that a Chapter 11 law would be better. It will take until the recession after this to test that new regime however.


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