David Cameron has highlighted the risk that the credit crunch will lead to a
huge increase in business failures. He believes that aspects of the US Chapter
11 process may give good companies the chance to be rescued or restructured. But
it is businesses not the insolvency process that must change.
Whether it is administration in the UK or Chapter 11 in the US, the process
is quite similar. Directors can apply to the courts for protection from their
creditors while seeking to restructure their business. This moratorium allows
time to plan and implement restructuring proposals.
The principal difference between administration and the Chapter 11 process is
that in the US the company remains under the control of its directors, not its
Given that, broadly speaking, the processes are similar, why do people often
cite Chapter 11 as having particular advantages over our administration process?
Perhaps poor managers are unwilling to face up to the real reasons for
insolvency. Businesses go bust because they run out of cash.
Successful businessmen are those who recognise that cash is king and plan
As the credit crunch bites, well-managed businesses will have considered the
consequences already. They will be managing cash even harder. Where insolvency
appears inevitable, they will have identified funding; mapped out proposals
acceptable to secured lenders, other creditors and shareholders; and will see a
restructured business emerge.
Poorly managed businesses will delay implementing key measures to save cash,
and will make a last minute call on lenders for more funds at a time when
lenders are least likely to be sympathetic. The poorly managed business will
enter insolvency with no plan, no funding and with creditors at the end of their
tether. The prospects for a successful restructuring will be limited.
The stigma of insolvency results in management delaying the inevitable,
reducing the opportunities to keep businesses intact. Until businesses adopt a
more rigorous approach to cash management and enter insolvency processes at a
much earlier stage, there is little prospect of creditors accepting the idea of
the directors of those businesses staying in the driving seat while their
businesses are restructured.
James Money is a director at Smith & Williamson
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