Cameron Unveils Tory Plans for US "Chapter 11" Insolvency Rules

by Christina 123 | July 15, 2008 at 07:06 pm | 130 views | add comment

A proposal by Conservative leader, David Cameron, to introduce US-Style insolvency rules has come into criticism by corporate recovery specialists. In the US, "Chapter 11" requires that a struggling company may be given a chance to recover by finanical aid from specialised investors, however, In the UK most of the major lenders propping up business are the banks who would be loath to renounce control.

Cameron backs US-style insolvency rules
By George Parker and John Willman

Published: July 14 2008 22:18 | Last updated: July 15 2008 09:15

David Cameron will on Tuesday commit a Conservative government to importing US-style Chapter 11 insolvency rules in an attempt to save companies from going to the wall during economic downturns.

Mr Cameron will say a Tory government would give companies “breathing space” to restructure, protecting them from creditors and curbing job losses.
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He will tell the CBI employers’ group: “The credit crunch has meant more companies are finding it hard to get the money they need to keep their business alive. That means one thing: more companies going into liquidation.

“And we all know what liquidation means – job losses. This isn’t right for the companies which are fundamentally sound, nor for the banks who lend these companies money, nor for its employees who are being laid off.”

Mr Cameron believes Britain’s insolvency system does not afford enough protection to struggling companies, a view shared by many business leaders, who fear a growing wave of insolvencies as cash-strapped banks refuse to lend more to companies and call in loans from those in trouble.

“There are some very helpful aspects of the Chapter 11 system that can give companies a better chance of survival and reorganisation,” Mark Byers, head of recovery and reorganisation at accountants Grant Thornton, said on Monday.

The European High Yield Association, which represents banks, investors, lawyers and insolvency experts, warned last year the UK’s insolvency regime needed an overhaul. Increasingly complex restructurings involving hedge funds and private equity firms as well as banks required a “predictable, supervised restructuring process” handled by a court.

However, some insolvency experts have warned against the court-run US approach that allows distressed companies to enter and leave Chapter 11 more than once.

Mr Cameron will say the Tories will consult on which aspects of the US system should apply in the UK.

However, his advisers 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.

Mr Cameron’s speech, which will focus on the economy generally, will attempt to rebuild bridges with the business community, which has deplored his opposition to a new runway at Heathrow and reforms to the planning system to facilitate big infrastructure projects, such as nuclear power stations.

Copyright The Financial Times Limited 2008