'In the US, if you haven't been bust two or three times, you haven't been in business'

MARC KIRSCHNER, a partner with the US law firm Jones Day Reavis & Pogue in New York, has helped to sort out the affairs of some of the biggest recent corporate bankruptcies in the US, including the American end of the Robert Maxwell business. He is convinced that the American system is far better than the British one at helping troubled companies to survive, and therefore better at saving jobs.

The main plank of the US bankruptcy code, called Chapter 11, has been used for the American side of many of the biggest international collapses of recent years, such as Maxwell and Olympia & York. The big difference between Chapter 11 and its British counterparts is that the US system leaves the existing management in possession of the company and makes it the key player of the rescue plan.

In the UK, the receiver or liquidator takes possession of the company on appointment - usually by using gangs of bailiffs and security guards to seize goods, change locks and so on.

The creditors' committee is more important in the US, says Mr Kirschner, in that it has access to far more of the company's confidential financial data, and it usually becomes the main adversary to the management in drawing up the rescue plan.

Mr Kirschner believes that unless there is evidence of a fraud, the best person to turn around a company is the existing management - simply because they know the most about the business. And if new management is needed, then the American practice is to bring in experienced managers from the same industry. For instance, the Helmsley Palace Hotel in New York, currently in Chapter 11, is now being run by a hotel management company. In the UK, by contrast, 'you are always reaching out for accountants,' says Mr Kirschner. With few exceptions, UK receivers and liquidators are accountants.

Unsecured creditors also have a better deal in the US, he says, because American creditors' committees are legally empowered to investigate the company and advise on the reorganisation plan. In Britain, an administrator will draw up his plan without reference to creditors.

Every Chapter 11 scheme is supervised by a government trustee who can challenge legal or professional fees.

The Maxwell saga has shown how the US system can operate alongside the UK one. The US part of Maxwell Communications Corporation is in Chapter 11, while the UK side is in administration. The remaining US companies such as Official Airline Guide are in the process of being sold off. 'I think the MCC case is a good lesson to UK practitioners in how the US way can save jobs,' says Mr Kirschner. 'I think the UK should move to a reorganisation system.'

Eddy Weatherill, the chief executive of the Independent Banking Advisory Service, is convinced that the US system is better at handling honest, hard-working business people who have run into problems. 'There's an old attitude in the States that if you haven't been bust two or three times, you haven't really been in business,' he says.

Most UK insolvency experts oppose importing the American system of Chapter 11, because it leaves 'the chicken in the coop,' or even worse 'the burglar in the jewellers' shop'.

The idea of allowing the debtor to remain in possession of the company while it sorts out a repayment deal with creditors also worries UK banks, which have traditionally relied on taking collateral against loans - collateral they can claim if the company fails to pay its bills.

Criticism of Chapter 11 is not limited to Britain, however. In the US, businessmen are increasingly worried that the process is being overused by companies who see it as a convenient way to cut costs and undercut the competition.

Far from being used as a last resort in times of deep financial stress, Chapter 11 is now viewed as an everyday business tactic.

This is damaging for healthy companies, as they face competition from corporations in Chapter 11 that do not have to pay the same overheads - in Chapter 11, companies do not have to meet interest charges and other repayments to creditors.

This problem is at its most acute in the US airline industry. Most of the country's airlines are now in Chapter 11 - still operating but without having to make any payments to creditors. The minority of airlines not in Chapter 11 are consequently finding it almost impossible to make profits in the face of such unfair competition.

Thus even US observers are now wondering whether Chapter 11 should be reformed - to become more like the UK system. It seems that the perfect solution to insolvency remains elusive.

(Photograph omitted)

PROMOTED VIDEO
Arts and Entertainment
glastonbury
News
i100
Arts and Entertainment
Shock of the news: Jake Gyllenhaal in ‘Nightcrawler’
filmReview: Gyllenhaal, in one of his finest performances, is funny, engaging and sinister all at once
Arts and Entertainment
Shelley Duvall stars in Stanley Kubrick's The Shining
filmCritic Kaleem Aftab picks his favourites for Halloween
News
people
Arts and Entertainment
Kit Harington has been given a huge pay rise to extend his contract as Jon Snow in Game of Thrones
tv
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Taste the difference: Nell Frizzell tucks into a fry-up in Jesse's cafe in east London
food + drinkHow a bike accident left one woman living in a distorted world in which spices smell of old socks and muesli tastes like pork fat
Sport
Luke Shaw’s performance in the derby will be key to how his Manchester United side get on
footballBeating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Life and Style
Google's doodle celebrating Halloween 2014
tech
Arts and Entertainment
Don’t send in the clowns: masks and make-up conceal true facial expressions, thwarting our instinct to read people’s minds through their faces, as seen in ‘It’
filmThis Halloween, we ask what makes Ouija boards, demon dolls, and evil clowns so frightening?
News
peopleFarage challenges 'liberally biased' comedians to 'call him a narcissist'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Market Risk Manager - Investment Banking - Mandarin Speaker

£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Day In a Page

The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes