Yesterday I pointed out that David Cameron’s speech advocating the introduction of a Chapter 11 type procedure into UK law was somewhat peculiar given that the Thatcher government had introduced the system of administration which imposed a moratorium on debt enforcement against a company, in an attempt to promote the rescue of failing companies. This procedure gives an opportunity to restructure companies, replaces the failing management, and if the company cannot be rescued the company will then go to the wall. If the company can be rescued it survives – with no financial cost to the taxpayer, the procedure being self-financing as the administration expenses are preferred creditors in the distribution of the assets of the company.
Accordingly, as I said yesterday Cameron’s speech was an example of the operation of modern politics:
“Something must be done to address this awful problem. IN this case that something that must be done is to be virtually identical to the something that has already been done. When the something that must be done is pronounced earnestly (and greeted with applause by people who should know better) with a veritable plethora of soundbites that sound good to the general populace - pro-business, pro-rescue, pro-employee - the [lack of content] is missed [in] the general swell of support.”
So, how has his speech been greeted by the media – with cynicism that his preferred course of action is effectively no change?
of course not.
For Fraser Nelson at The Spectator the roof has fallen in as part of a giant left wing conspiracy:
“The brutal truth is that the process of wealth creation, and job creation, requires allowing badly-run companies to fail. This creates space in the economy for better-run companies to prosper. Letting firms cheat death with state aid (legal or financial) helps no one in the long run. In the 1980s, a Conservative government reintroduced these principles to Britain. The subsequent economic realignment was bloody and costly, but bequeathed an economy which worked right up until Labour ramped it up with cheap debt – ending in the bursting of the Brown Bubble. The last thing the British economy needs is more of the “moral hazard” which Mervyn King so rightly worried about (before the Northern Rock bailout realised his worst fears). The Conservatives are supposed to be the party which understands the principles of wealth and job creation. Mr Cameron’s policy is clearly designed to say to the employees of the many firms who go bust in the next two years “ah, you’d be protected under the Tories”. So a short-term tactical gain. But this is not a policy which has Britain’s long-term economic interests at heart.”
Well, let’s examine the first part of this statement. Badly run companies should fail in order to promote general prosperity in the economy – yep, that’s generally how insolvency law works. Our system applies in a peremptory manner with no discretion and the first action in any formal insolvency proceeding in the UK (Scotland, Northern Ireland, or England and Wales – despite the differences in substantive law in each system) is to replace the management to allow (down the line a little) the reasons for failure to be examined. This was a key element in the Cork report – that underpinned the various legislative reforms from the mid 1980s onwards. But, “Letting firms cheat death with state aid (legal or financial) helps no one in the long run. In the 1980s, a Conservative government reintroduced these principles to Britain.” As I’ve pointed out it was the Tory government that introduced administration, the Tory government that accepted that not all failing businesses must necessarily fail – that some simply require better management (hence the requirement in administration to replace the previous board). If the successes that Mr Nelson perceives in the economy of the 1980s were genuine – then this was with a system that had a Chapter 11 equivalent. That the process was merely part of the picture – that other failing businesses could be managed out of problems (or in other cases run down) by a receiver – appointed to represent the interests of one creditor (typically the bank, which was itself best protected if the company did go under – also appears to have passed Mr Nelson by. The receiver also replaced the management, and his or her role in proceedings was never challenged by the Conservative party during their period in power. INdeed in Scotland it was the Heath government that introduced receivers, ostensibly to promote corporate rescue as well as to make the enforcement of floating charges easier. You may be correct, Mr Nelson. Perhaps companies shouldn’t be saved. Perhaps they should go to the wall, but to suggest that Cameron’s non-idea is some betrayal of Thatcherite policy, when it was her government, indeed her Trade team that introduced it already in 1985-6.
And as for state aid underpinning insolvency processes – best not to mention that it was the Thatcher government that encouraged a boom in Scottish personal insolvencies in the late 80s/early 90s by effectively underwriting processes and guaranteeing that the accountant appointed as trustee to administer the estate would be paid however small the estate. The policy is sensible in some ways (indeed, the legislation in force from the start of April in Scotland effectively makes bankruptcy easier for those debtors with low income and no assets by putting it wholly in the hands of a state officer, the Accountant in Bankruptcy – but such state aid for “failure” in the sphere of personal insolvency was – if not introduced – endorsed by the Thatcher government (That George Younger and Malcolm Rifkind must have been closet lefties running Scotland obviously during their times as viceroy).
And to suggest that this is a short term tactical gain – ignores the fact that this is virtually the system that we have at the moment. It may be that the only difference is the pivotal one: that Cameron wants to keep the failing mangers in place, that Thatcher (and Mandelson) wanted to replace them. If that is what is wrong about Cameron’s objective (and as I indicated yesterday Vince Cable targeted that very effectively) then let us concentrate the criticism on that. Let’s not pretend though that Cameron’s idea is some tectonic shift in the plates underlying insolvency law.
Nelson’s analysis is not alone, though. At Liberal Conspiracy yesterday there was an article similarly suggesting that Cameron was moving away from Thatcherite economics. Again the position of Thatcher’s government is caricatured where it is suggested that Cameron’s proposal
“is a flat contradiction of standard neoliberal economics. This says that the very fact that a company is bankrupt is a sign that it has little value; the market – customers – judges things right. The firm should therefore be broken up, so that workers can be released to find more productive employment. And in removing excess capacity from an industry, the firm’s more efficient rivals will become more profitable, allowing them to expand. And the notion that bankrupt firms can be restructured is pish; if there were a way for the firm to become more efficient, either the existing managers would have found it, or the firm would have been bought by those who can make a go of it. That this hasn’t happened shows there’s no hope for the firm. Now, this view was pretty much orthodox Thatcherism. “Lame ducks must go to the wall” was a cliché of the early 80s. And the reason Thatcher called coal mines “uneconomic” – rather than just unprofitable – was because she thought miners would find better work than digging up cheap coal*.”
Mr Dillow, the writer, then goes on to note that Cameron’s support for CHapter 11 is because it is “certainly good for investment bankers and lawyers, as creditors spend a fortune fighting over the scraps” although it is not clear if this is the case with administration. The reason for this is that like Mr Nelson, Mr Dillow ignores one rather inconvenient truth - that it was the Thatcher government that introduced the original Chapter 11 equivalent, administration. Thus, the analyses asking why Cameron is departing from the Thatcherite view suggests that either the writers are ignoring the legal background, that Cameron was and is unaware of the legal background, or some massive blindspot has overcome everyone.
I’m confused and bemused and have left comments with both posts. If anyone can explain why there’s so much fuss about Cameron supporting the existing law, and why there’s so much fuss about Cameron supporting a policy his idol originally introduced I’ll get back to you.