A Case for British Chapter 11

It takes many years to develop a business and for it to grow. Enterprises employ millions of people who support their families and are the building blocks of our national wealth. Should we not be more supportive, as a society, when a company fails?

Since 2000, the number of businesses in the UK has increased each year, by 3% on average. In 2016, there were 2.2 million more businesses than in 2000, an increase of 64% over the whole period. Businesses actual employment of people has fallen since 2000 from around a third, to a quarter. This decline is due to the growth in self-employment. The total number of company’s insolvencies from 2013 to 2016 was just over 70,000 (Office of National Statistics).

In most countries, there are two tests for bankruptcy:

  • A company that cannot pay its debts because there is not enough money in the bank (this would tip a company in the UK into liquidation);
  • A company with liabilities that exceed its assets (the company can avoid liquidation if it can negotiate a deal with its creditors).

The UK’s insolvency system, on the whole, returns more money to creditors (as it’s more creditor centric) and is faster and cheaper than the United States, for example. However, a common complaint among struggling firms under the threat of insolvency is that the time for decision-making is too short. Critics believe firms need a longer period to consider their options and take decisions without jeopardising the company’s supply chain and increasing pressure on their cash flow, both of which will accelerate the commencement of insolvency. Therefore, there is a desire to ask the government to copy the Chapter 11 system in the United States, where companies are allowed 90 days’ grace.

Chapter 11 is a form of bankruptcy that involves a reorganisation of a debtor’s business affairs. It allows companies the time they require to restructure their debts subject to the debtor’s fulfilling their obligations under a plan of reorganisation.

Example of companies who have re-emerged from bankruptcy to become profitable, in the US, and successful are: –

  • Apple
  • General Motors
  • Marvel Entertainment

The main issue against introducing Chapter 11 in this country is that courts will need to get involved; currently, we don’t rely on the courts as much. Consequently, this means that there will be an increase in cost and red tape for companies facing insolvency.

Consumer-focused companies, it seems no matter how large, who do not have an extensive web store presence, are failing as they have not kept in line with their new marketing mix. I don’t want to advocate continuous unequivocal support for the industry as we did so disastrously with the likes of British Leyland for example. I do think that as a nation we should give SMEs and larger industry all the help we can so that companies can restructure back to their core business and survive – as Toys R Us are trying to do in the US – but it seems Maplin can’t in the UK (with a possible 2300 employees permanently losing their jobs).

* Tahir Maher is a member of the LDV editorial team and the Chair of the English Party

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6 Comments

  • Definitely worth investigating. I wonder whether, given the circumstances of a number of high profile bankruptcies we’ve had in the UK, we need to differentiate between trade creditors (ie. suppliers) and investor creditors (ie. hedge funds, banks etc.).

  • Nonconformistradical 5th Apr '18 - 3:58pm

    I thought the UK equivalent of chapter 11 was administration – however…

    Roland’s point about differentiating between trade and credit customers is very important – it is small suppliers who get fleeced when a major company goes down – having already been fleeced through delays in payment – which seem to be fairly standard (and completely unethical) with many large businesses.

    And what are the auditors doing? How on earth can a situation arise when when one can go to bed one night having seen a news item about Carillion being about to go into administration and wake up the next morning to find it is being liquidated????

  • Nonconformistradical 5th Apr '18 - 4:08pm

    Oh and Maplin lost the plot by trying to compete with other larger organisations selling stupid gadgetry to gullible people instead of sticking to selling useful components etc – which it could have done by mail order with no need for a street presence.

  • Peter Hirst 8th Apr '18 - 2:11pm

    If a company is non viable, the sooner it folds the better so the owner can try again. But what is a non viable company? Three months grace seems fine and perhaps contracts with creditors should reflect that. Any firm or investment agency dealing with a new business knows the risk. Perhaps the insurance industry could get involved. It is up to the owner to decide if it’s worth plodding on or not but the process should be there in case he does want to continue with his present model.

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