OUTLOOK: Chapter 11 is not a bankruptcy panacea, but it does have its merits

 

Outlook Would reform of Britain's bankruptcy laws help to correct the power imbalance that exists between banks and the businesses they lend to?

Harold Tillman, the former Jaeger chairman, will urge the Coalition next week to do just that. Mr Tillman blames Lloyds for the fate of the fashion house, whose debt was bought by Jon Moulton's Better Capital, leading to the firm going into administration. It trades today under the ownership of one of Better's funds.

Mr Tillman says he had a plan in place that could have paid off the debt after the firm hit a spotty patch thanks to an unusually warm winter. He was on holiday while the debt was being sold and says he was unaware of what was transpiring.

Lloyds tells a different story, arguing that Better was brought in by the board of Jaeger and that the bank's actions ultimately saved hundreds of jobs, evidenced by the fact that Jaeger is still trading under Mr Moulton's watchful eye.

This very public disagreement between the two sides would not have happened in the US, because Mr Tillman could have sought protection from the bank by taking the company into Chapter 11 bankruptcy. Taking such a step could – we are looking at this with hindsight now – have afforded him the time to put his plan into effect.

The UK's insolvency regime has undergone several important reforms over the last couple of decades. We no longer have a situation where a bank can appoint a receiver to ensure it gets its money before a liquidator takes over to dole out what scraps remain.

Chapter 11 is also no panacea. It can be cumbersome and expensive. Management is required to seek court approval for the steps it wants to take as part of the restructuring. By contrast, an administrator in Britain can grant rapid approval to proposals that management (which is often kept on) might make while acting in the interests of all creditors.

It is also true that the outcomes from Chapter 11 aren't necessarily any better than those from a UK insolvency.

All the same, what Chapter 11 does do is reset the balance of power between debtor and creditor, putting the former in control rather than the latter.

There are many people in the UK who would argue that if debtors fail to pay their bills then they shouldn't be left in control of the ship while it is sinking. However, the government adviser Lawrence Tomlinson's report into Royal Bank of Scotland's Global Reconstruction Group suggests that creditors can easily abuse their power.

It must be stressed that Tomlinson's case has yet to be proven (watchdogs are investigating). But it paints a picture of a predatory unit that tipped viable businesses over the edge. If even part of that is correct then there may be good reason to shift the balance of power in favour of the debtor.

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