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Should the UK and the Eurozone adopt America’s Chapter 11 format for bankruptcy?

Guest post by: Russell Bowyer

Article Overview: In America, when a company gets into difficulty it can file for what is called Chapter 11 which is named after the U.S. bankruptcy code 11. Chapter 11 is a form of bankruptcy that involves a reorganisation of a company's business affairs and assets and it generally filed by corporations that require time to restructure their debts. In essence, Chapter 11 gives the company a fresh start, subject to the company's fulfillment of the obligations under its plan of reorganisation. Whereas in the UK, for example, a company has to either go into receivership or liquidation. Where a company goes into liquidation the business ceases and the company's directors appoint a liquidator to sell the assets of the company in order to pay off as many of it's creditors as is possible.

Should the UK and the Eurozone adopt America’s Chapter 11 format for bankruptcy?

In America, when a company gets into difficulty it can file for what is called Chapter 11 which is named after the U.S. bankruptcy code 11. Chapter 11 is a form of bankruptcy that involves a reorganisation of a company's business affairs and assets and it generally filed by corporations that require time to restructure their debts. In essence, Chapter 11 gives the company a fresh start, subject to the company's fulfillment of the obligations under its plan of reorganisation. Whereas in the UK, for example, a company has to either go into receivership or liquidation.

Where a company goes into liquidation the business ceases and the company's directors appoint a liquidator to sell the assets of the company in order to pay off as many of it's creditors as is possible. However, in the majority of cases creditors and shareholders in a company that is in liquidation invariably lose out. In the case of a company that goes into receivership, the receiver that is appointed will try to sell the business as a goping concern in order to safeguard the business, as far as is possible.

In the case for filing for Chaper 11 a trustee is appointed to reorganize the bankrupt company and although the existing claims of security holders and creditors are likely to be reduced or replaced with different claims, it is expected that the firm will continue operating, thereby safeguarding the business as a going concern and the jobs for the employees of the business.

In the event of Chapter 11 Filing, both the creditors and owners must vote to approve the plan before the reorganisation can be confirmed by a court action and thereby become effective.

The main diffence with Chapter 11 to receivership in the UK is that the shareholders of the business retain their holding in the company and, subject to approval by the creditors, the business will continue into the future in a restructured way, which seems to be a win-win situation for everybody involved.

In the present credit crisis it is very likely that there will be a large fall-out for businesses. We have already seen banks being proped up by governments in countries across the globe, but where non-banking businesses are concerned there will be no government to bail them out! So with the economic downturn already happening, only time will tell as to how many failures there will be.

in-business.org.uk invite your comments on this item please...

Also,at times like this it is even more important to look at those all important cash flows - using the Bowraven's Cash flow forecaster, you can do this.

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Article Tags: assets, bankruptcy code, business affairs, chapter 11, companys business, corporations, creditors, fresh start, fulfillment, liquidation, liquidator, receivership, reorganisation



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