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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.

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