How politics works – something must be done, even if it was done 5 years ago

A long time ago in a political climate far far away Sir Kenneth Cork chaired a committee on INsolvency Law and Practice.  Sir Kenneth was conscious that the then applicable system of business insolvency was not working effectively.  Among other things he noted that insolvency law should provide “a means for the preservation of vaible commercial enterprises capable of making a useful contribution to the economic life of the country” (para 198 (j), Cmnd 8558, 1982).  To that end his committee proposed the introduction of something known as administration.  This – a collective process for all creditors – would place a moratorium on enforcement proceedings against the company and give it a chance to get back on its feet.  Cork envisaged that this, coupled with a reduction in the power of floating charge holders (typically the big banks who have loaned to companies) would aid corporate rescue, for the floating charge benefited one already powerful creditor at the expense of lots of little creditors in the distribution of assets, and also entitled the big creditor to replace the management of a company with its own appointee – whose duties were owed not to the general body of creditors, but to the big creditor.  Administration, as a collective process, would aid corporate rescue, avoid the potential unfairnesses to the many creditors at the expense of one big creditor – emphasising the principle paritas creditorem (all creditors should be treated equally).  The key element though in either process was the removal of incompetent managers.  While the management was removed it could be investigated – to examine the reasons for failure.

The Tory government introduced administration – but did not reduce the power of the floating charge holder.  Accordingly with the Insolvency ACts 1985 and 1986 there was no real change in corporate insolvency culture.  Throughout the time after the 1986 Act the courts (in Scotland) attempted to redress the balance in favour of smaller creditors.  While violating general legal principles small creditors started winning small victories over the floating charge holder.  But the general rules remained.  Until 2003.  That year, the Enterprise Act 2002 came into force.  This ACt – promoted by the much maligned Peter MAndelson sought to redress the problems of 1986.  This restricted the power of the floating charge holder (removing the power to put businesses into receivership and forcing new floating charge holders to put companies into administration if they sought to protect their interests.  It sought to make administratione easier (albeit using legislation incomprehensible even to afficionados (Sir Roy Goode, doyen of commercial law professors described dealing with the legislation in his book Principles of Corporate INsolvency “To read the amended Insolvency ACt 1986 it no longer suffices to be a lawyer; it is necessary to become a physical geogrpaher in order to find one’s way arpound provisions which are randomly dispersed among the body of the Act, the bizarrely numbered Schedules A1 and B1 and the Insolvency Rules, with seemingly no logic in the distribution nor any conception that it might be useful if all provisions dealing with the same subject were brought together in clearly stated requirements. … [T]hose who enjoy finding their way round mzaes might give Hampton Court a miss and try their hands at tracking down the meaning of “Hire-purchase agreement” in paragraph 43 (3).  All that is required is perseverance and a passion for concentric circles.”)

Contrary to Cork’s original recommendations the 2002 Act provided that administration could be entered into without court control (an odd tendency in British debt enforcement procedures) – allowing floating charge holders or directors to put the company into administration without the costs of court involvement.

Early statistical studies indicate that the new regime is encouraging increased use of the rescue provisions.  They seem to be bedding in well, and while the legislation could be better drafted and better structured, it seems to be achieving its objective.

So, what has prompted the statements of David Cameron today?  He argues that Britain needs a corporate rescue regime – to give businesses breating space to allow restructuring and to protect jobs.  

“In America they have Chapter 11 which is a stay of execution,” he told the Today programme. “Instead of companies going straight into liquidation and having to lay off staff, they get a stay of execution and they can be restructured to try to save the business, to try to save the jobs. Now that doesn’t actually cost taxpayers money, but at a time when we’ve got economic difficulty and at a time when companies may get into these sorts of problems, we ought to be taking action now, showing leadership now to try to save those jobs.” 

Well, we have that.  It’s called administration – where businesses are given one year’s breathing space to restructure and attempt to save the company – by barring creditors from enforcing debts against the debtor business.  The expenses of administration are borne by the company – and given a preference over various other creditors (meaning the taxpayer doesn’t pay).  His party brought it in, and the other lot adapted it.  So, what on earth is he talking about?

He was criticised by John Hutton who said the plans were ill thought through (despite being largely what we have in place at the moment – as introduced by his government).  (Although to be fair to Hutton he did point out that new legislation had come in to deal with many of these points).

What Cameron is seeking is something equivalent to the US chapter 11 procedure (which comparative lawyers compare sometimes favourbaly, sometimes unfavourably with our new administration regime).  The big difference from our current regime is that under that process the management that has led the business into financial difficulties is not replaced.  As Vince Cable says,

“The Conservatives claim to support free fair and competitive markets, yet they now seem hell bent on introducing a measure which only helps incompetent executives. Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations.” 

Perhaps Cameron can explain the advantage of that?

Anyway, this is apparently how modern politics works.  Witness the recent posts about the SNP and their legislation.  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 zero content is missed the general swell of support.  Why are people taken in by this?

And why was Cameron not questioned by the journos on the fact that we have this system that he was advocating virtually in place at the moment?


About loveandgarbage

I watch the telly and read when not doing law stuff and plugging my decade and a half old unwatched Edinburgh fringe show.
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One Response to How politics works – something must be done, even if it was done 5 years ago

  1. hoiho says:

    Why are people taken in by this?
    Becauae they don’t knwo what the current situation is, so can’t recognize the zero content or identical content; they only see the form of “doing something”.
    And why was Cameron not questioned by the journos on the fact that we have this system that he was advocating virtually in place at the moment?
    Because (with a very few honourable exceptions) modern journalists are the ultimate generalists; they know nothing about everything. hence they have little, or no, idea what is in place at the moment.

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