UK: CULTURAL DIFFERENCES - LESSONS TO BE LEARNED FROM GOING UNDER OVER THERE.

UK: CULTURAL DIFFERENCES - LESSONS TO BE LEARNED FROM GOING UNDER OVER THERE. - One of the difficulties with learning anything from how other countries deal with the issues raised by business failure is that the cultural backdrop to insolvency legislatio

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Last Updated: 31 Aug 2010

One of the difficulties with learning anything from how other countries deal with the issues raised by business failure is that the cultural backdrop to insolvency legislation is so different.

In France, legislation seems to have been shaped by the fear that when companies go under, the masses might just rise up and hang directors, bankers and all. When firms enter the process of 'redressement judiciaire', France's equivalent of Chapter 11, the bankruptcy court invites employees to appoint a representative. While companies are in the equivalent of receivership, redundancies may only be made with the judge's approval, after consultation with the employees' representative.

In Germany, where the concept of failure could be said to be an emerging one, insolvency legislation dates from 1877 and is largely unworkable, so banks and companies usually hammer out voluntary agreements.

Metallgesellschaft's collapse is forcing a rethink, and wholesale changes are in the pipeline, but Germany has arguably been able to do without effective legislation simply because the banks and the companies they lend to are so tightly integrated.

Britain's cultural disposition is different again. Currently, CVAs can only be implemented if all the creditors, secured and unsecured, play ball from day one. The 'administration' process instituted in the 1986 Insolvency Act introduced debt moratoriums giving them greater control over the outcome of the process at little extra cost to themselves.

Speaking from Price Waterhouse's London Bridge edifice, the SPI's Colin Bird points out, 'Half a mile from here is the Clink Prison. It was a debtors' prison. It isn't very long ago when we threw them in jail. The culture in the UK has been "If you screw it up, you move over and those who suffered as a result put someone else in charge to sort it out". It's not a backward culture, and no more right or wrong than the American culture which says 'If you screw it up you deserve a second chance".' The second problem is corporate mythology. UK business executives may be quick to point to a few celebrated cases of US companies going through the Chapter 11 process and emerging stronger: 7-Eleven is one such phoenix.

A counter-myth emerging within the British banking industry is that the disillusionment with the procedure in the US is evidence that the debtor-in-possession concept is a non-starter. Barclays' Theobald comments, 'I think a lot of people from the media (in the UK) with an awareness of how long it takes to put work-outs together and of the costs involved will say it's about time we moved to the American system. But if you talk to the practitioners in America (about the costs) they say "double it" in terms of what goes on in the US.' Professor Stewart Gilson of the Harvard Business School, a leading US expert on Chapter 11, points out, 'Critics of Chapter 11 here like to point to a few highly controversial examples where the system has failed, like Eastern Airlines where the judge decided that it was in the public interest to have the company continue to fly.' Countering the view of British insolvency practitioners that Chapter 11 cushions incompetent managers from the consequences of their misdeeds, Gilson claims his research indicates that, on average, two-thirds of senior managers are replaced when companies go through the process and all suffer 'heavy reputation loss'. He concludes, 'More and more countries are trying to emulate the American system and in that sense it has proved itself in the market.'.

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