News Analysis - Insolvency law shake-up bridges Atlantic divide.

Popular wisdom may have it that what happens in the US one year is likely to follow in the UK the next, but cross-Atlantic influences are moving both ways when it comes to the rocky issue of how to deal with a business that hits hard times.

In the world of insolvency and business recovery, the creditor has always been king in the UK; while our English-speaking cousins across the Atlantic have protected the businessman in crisis at the expense of those he owes money to.

British and American counterparts are now eyeing up each other’s systems and working to incorporate the best points of their once polarised cultures into business life and legislation.

Over there, the US senate has begun to review business recovery legislation with an eye on beefing up creditors’ rights; while over here, a raft of government activity is underway to encourage a ‘rescue culture’ and reduce the number of companies that are liquidated.

This year has seen the Insolvency Bill start its journey through parliament offering a 28-day moratorium or freeze on creditors exercising their rights – a move designed to give struggling businesses the time to put in place a plan for turn around and recovery.

And the Department of Trade and Industry has also launched its consultation paper, Bankruptcy: a Fresh Start, to look at how to reduce the stigma of personal insolvency; alongside a further review of company rescue and business reconstruction mechanisms for small to medium-sized business.

‘There is a meeting on a middle ground between UK and US approaches to insolvency,’ explains Simon Freakley, senior partner at corporate recovery group Kroll Buchler Phillips.

‘The US has concluded that its debtor-friendly system needs to give creditors more protection; while it’s the other way around in the UK, with the government saying we are far too creditor-orientated and need to look at the needs of debtors.’

Labour has made an enthusiastic show of support over the last three years to nurture a US approach to risk-taking in business and for insolvency legislation that gives struggling small companies time to get out of short-term crises.

Trade and industry secretary Stephen Byers last year, on the release of the interim report of the company rescue review, stated: ‘If we are to encourage responsible risk-takers, we need mechanisms in place, which allow basically viable businesses to survive any short-term financial difficulties they may encounter.’ The Insolvency Bill and reviews come almost two decades after the Cork Report into UK rescue culture that lead to the 1986 shake-up of the insolvency laws – and the introduction of administration and company voluntary arrangements (CVA) to aid business recovery.

‘The government has seen that the vast majority of entrepreneurs who fail are small businesses and they need to be helped to survive,’ he said.

‘Rescuing a structure is better than losing it, although there has to be a balance struck with the interests of creditors, and current developments are moving towards making it easier for the honest debtor to survive and recover business.’

The insolvency profession has been lobbying for further change for over a decade and Peter Mandelson as trade and industry secretary took up the mantle for change after a fact-finding mission to California in 1998 to look at hi-tech start-ups.

Government debate has centred on the debtor-friendly Chapter 11 of the US Bankruptcy Act, which allows management to file for reorganisation without consent from creditors, with some experts finding higher recovery rates for creditors under the law.

A recent study by Rafeal Porta of the rights of senior secured creditors around the world found the UK still the most creditor-friendly regime.

The United States emerges as one of the least pro-creditor countries, with an automatic stay on assets, unimpeded petition for reorganisation and provision for the company’s board to remain in control.

‘The UK government has got obsessed by Chapter 11, but if you look at incidences of successful business rescue it’s very small in proportion to the successful rehabilitation of business in the UK under its corporate voluntary arrangement,’ argues Freakley.

‘The company rescue review has shown the government that the UK system is working and a turn-around culture is gathering momentum.’

He also points to the US principle of super-priority funding, in which specialist recovery financing is made available for equity, as another transatlantic influence on the UK recovery sector.

‘In the US they are questioning more and more the right of debtors to be rescued at any price and are more prepared to crackdown on the side of creditors for the common good,’ says Neil Cooper, UK president of international insolvency body Insol, and also a partner at Kroll.

Beyond the special relationship, there are also international moves afoot to reorganise insolvency laws, with a World Bank and United Nations project in New York involving 80 countries meeting later this month to discuss the development of model global laws on insolvency.

Association of Business Recovery Professionals

www.insolvency.org.uk

Insolvency Bill

www.publications.parliament.uk

UK INSOLVENCY BILL – THE MAIN POINTS

– Directors of small companies will have the right to apply for a moratorium lasting for an initial period of 28 days (extendable with creditor support for a further two months)

– The moratorium will come into force automatically upon the filing of certain documents with the court, but no court order is needed

– The moratorium will have the same consequences as a moratorium flowing from an administration order

– Directors will remain in full control of the company’s affairs, but they may only dispose of assets in the ordinary course of business.