Analysis

Last week, packaging group Chesapeake's American parent company announced it was considering seeking Chapter 11 bankruptcy protection. This is similar to being in administration in the UK, with one key difference: the company in question remains in control of itself, rather than being placed in the hands of an administrator.

A company in Chapter 11 can go to court and, in accordance with bankruptcy laws, claim it wishes to reorganise its business because, in its current situation, it is unable to pay its creditors. Often, the court will come up with its own sanctions on the company, rather than giving a yes or no answer.

The supposed advantage, in comparison to Chapter 7, the US version of liquidation, is that a company that is viable but struggling – perhaps because of a previous owner’s activities – can gain some relief from its creditors as it restructures. Once it is through the troubled period, it can continue to operate  and rebuild itself, while creditors will still get paid, at least in theory.

No alternative
Currently, the UK has no direct equivalent, so a struggling company either has to fight on, come to an agreement with creditors in the form of a CVA or similar, or go into administration, at which point the owners lose control of their own destiny and the company is either rapidly sold on to somebody else or dissolved.

However, Con­servative Party leader David Cameron has said that, if his party wins the next general election, he would be interested in introducing something similar to Chapter 11, which he believes would allow good companies much needed breathing space to recover or restructure in the face of difficult trading conditions.

These conditions are already beginning to take their toll on the print industry. There has been a spate of administrations this year, including the UK operation of Que­becor World in January, which resulted in the closure of its Corby site. Another high-profile case was MPI and its subsidiaries. Mike Dolan, the former managing director at MPI, believes that he could have done things differently if Chapter 11 had been an option.

He says: “It is something we tried at MPI. We told creditors what the problem was, but said that we had a viable business and needed their help. Many of them were amenable, but it only takes a few to disagree. The problem is, there is nothing to force it through.

“The critical difference is that it enables you to go about your business as long as you have a viable business plan for the long term. At MPI, we would only have needed six months. In the UK, if nobody wants to put any money in, you have no choice but administration.”

Talk of introducing Chapter 11-style rulings has been brought about predominantly because of the current  financial situation in the UK. John Pulford, chief executive at Hendi Group, believes that now would be a perfect time for a change to be introduced.

He says: “In principal, if Chapter 11 provides advantages over the current CVA, then it has to be a good thing. We’re in an extraordinary environment and anything that can allow a company that’s found itself in an ex­­tremely difficult trading situation to fix its debts tem­­­porarily and carry on trading has to be in everyone’s interest.”

However, not everyone is in favour of the idea. In­­solvency practitioners, for example, are dead against it. It could be argued that, as they stand to lose business from the introduction of laws that could reduce the number of administrations, it is obvious that this would be the case. But Nick Hood, senior London partner at Begbies Traynor, believes that the expertise of insolvency practitioners is crucial in administration situations and far preferable to a business trying to do the job itself.

He says: “Administration does exactly the same job as Chapter 11, but you aren’t leaving the lunatics in charge of the asylum. You can tinker with a process, but I think it would be highly dangerous to introduce something like Chapter 11.

“Americans are not exactly enamoured with the way Chapter 11 is working, so why would we change a system that works perfectly fine, especially now?”

Argument against
His views are shared by many suppliers, who alongside employees are the most affected when a company goes into administration. Former chief executive of Premier Paper, Martyn Eustace, said that struggling companies should be made to “call it a day”. He added that, for the large, more complex organisations, a Chapter 11 arrangement could actually be the mechanism that destroys its financial situation.

It remains to be seen whether the Tories push through the Chapter 11 plans if they were to win the next election. However, it seems likely that they would have the support of many businesses if they did. Any­thing that helps prevent a good company from failing can only be a good thing for printers. However, prolonging the demise of an insolvent printer, considering the over capacity in the sector, could do more harm than good.