Newsroom

Rescue culture backlash

The British Property Federation (BPF) has dismissed plans to introduce American-style Chapter 11 bankruptcy protection for UK firms as ‘misguided’ because the British legal system is not geared up to oversee it.

Chapter 11 is a US form of administration where businesses are protected from their creditors under the supervision of a court. The idea is to allow a company to restructure, protecting jobs and the value of business assets. The process has allowed many big US firms to maintain their market position despite a failing business while new financing is found.

The Conservatives had mooted Chapter 11 last summer as a solution to current concerns about the insolvency process. A recent consultation by the Insolvency Service - ‘Encouraging Company Rescue’ – also proposed similar changes.

Ian Fletcher, BPF policy director, said: “Now is not the best time for reform because emotions are running high and we need to evaluate how the 2002 reforms have performed during the recession. Property companies and competing retailers have had concerns with aspects of the current system, which seems to place undue weight on propping up failing businesses and not enough on the consequences for healthy creditors and competitors.

“We would not like to see Chapter 11 reforms, because the British legal system is not set up to handle it. Neither do we like current Government proposals to give new secured creditors super-preference at the expense of landlords’ rent deposits. That is a sure fire way to limit small business access to property in the future. All political parties should be considering reform, but in the cold light of experience.”

It comes as Westfield chief Peter Miller had criticised retail rescue culture. “They set a very negative precedent for the market,” he said.

Miller said that Westfield preferred to deal with retailers and “on a one-to-one basis and not leave it to a vote from a variety of different landlords.”

DTZ head of retail Martyn Chase echoed Miller’s comments, saying CVAs were “an absolute disaster for the industry.”

“It’s a blatant abuse in terms of the retailers getting off the hook in terms of their property commitments,” he said.

“The Stylo Barrett one was a classic,” he continued. “They were going to half the portfolio and the CVA was just a way of walking away from rental obligations. Luckily it got voted down and they had to do the decent thing.”

Chase said that the situation abroad was far different. “European countries look on us in complete wonderment. Abroad, they jolly well have to face up to reality, they don’t just get a CVA and walk away from obligations. You either keep trading or you go bust, that’s the reality of life.”

Commenting on the proposed CVA for Blacks Leisure, he added: “Because the CVA has disappeared as it’s been seen as unacceptable, Blacks are now working it out with the bank. Jessops too are doing the same instead of trying to dump half of their shops and walk away. Any normal business has got to trade its way through.”

For more information and all PR and media queries, please contact Andrew Teacher, Head of Media, on 020 7802 0113 or 07968 12 45 45 or ateacher@bpf.org.uk, or James Anderson on 020 78280111.

Notes to editors

Chapter 11:

The features of Chapter 11 are not too far off those of CVAs.

The debtor company can acquire finance and loans on favourable terms by giving new lenders first priority on the businesses’ earnings and the court can give the company permission to reject or cancel contracts while the company is in a Chapter 11 administration.

Crucially the debtor company is protected from litigation and it is the original management team that continue to run the company.

This mechanism is commonly used in the US and it is primarily large companies that follow this form of administration – the most commonly cited examples being a number of the US airlines who have followed this route recently – on account of the demands of the arrangement and the costs associated with the procedure.

CVAs:

Current insolvency policy places significant weight on a rescue culture and little on the impact it has on other well-managed businesses. Supporting a struggling business at the expense of its creditors – including unsecured creditors such as landlords and other suppliers, risks spreading financial problems from businesses that might have suffered from poor management to businesses that are healthy and well managed. A rescue culture is generally good, but it needs to be weighed against the benefit of containing financial difficulties where they have arisen and not allowing them to spread to contractual counterparties, or creating too much unfair competition.

The BPF is concerned at present that the balance in policy terms has tipped too far towards rescue, regardless of the consequences for other businesses.

Encouraging Company rescue consultation – summer 2009:

The Insolvency Service consulted on a document across the summer which proposed:

- To extend the protection of a moratorium to businesses as part of CVAs.

- To encourage lenders to provide additional capital to struggling businesses once they are in a CVA – much akin to Chapter 11.

The BPF, in its response, highlighted:

- Encouraging new capital to be loaned to businesses in administration dilutes the holding of existing lenders, putting them is a less secured and thus more risky situation than they assumed when they lent the money. This will only add further discouragement on lenders to lend.

- Secondly, we requested that any proposals to include mechanisms to increase ‘debtor in possession finance’ DO NOT DILUTE the security of landlords rent deposits. This would have severe consequences for small businesses in that they would have to provide other security for landlords to grant them a lease, which would make it harder for them to access space. It may also encourage the greater use of personal guarantees which would flow against the policy of Communities and Local Government which has generally encouraged less use of them.