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

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The Independent Online
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.

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