There is much written about total debt and bankruptcy. Today I got yet another email titled “The alarming truth about Britain” with a link to a video and piece. I suspect that much the same can be – and is – written about a number of other countries. The United States and Japan spring to mind, not to mention certain countries in the Eurozone. Now this ‘truth’ has been thoroughly debunked in a piece by Frances Coppola some time ago. I follow her blog with interest because she explains complex financial and banking issues in as simple a way as possible. But there is a problem not so much about Britain (which with a sovereign currency cannot by definition end up bankrupt) but about corporate bankruptcy in the UK and how it is treated.
While we were away, you may have got the impression that I was resting and didn’t do much. That’s not true – in fact I read a whole book. Yes, a real one, not an e-book, one with pages that you turn and can drop when you nod off without worrying that you will break it, just maybe lose your page. You may be surprised that as a geek I don’t like e-readers at all. Not only do I prefer to hold a proper book, I also want to own it, not hold a licence to read it, so I can lend it without worrying that I will lose my whole library, as has happened to Kindle ‘owners’.
But I digress.
What was this tome that kept me awake at night? I generally read non-fiction – it’s that quest for knowledge, yearning for learning. So it wasn’t some novel which I may read from time to time. Nor was it science fiction on the grounds that most SF Is physically impossible – how did those three moons remain in synchronous orbit in Stargate? (Think Kepler. They couldn’t and it destroyed the movie for me).
No, it was a book about Israel called Start-up Nation by Dan Senor and Saul Singer; a book about how a young country produces more startups and innovation than any other country, including the United States.
Now I have some issues here. I am deeply sympathetic to the people of both Israel and Palestine and the awful situation in which they find themselves so let me say to start with that this post is no glory-worship of Israel. There are valid criticisms of the book but there are also aspects of the adversity that have led to a technological giant growing in the middle of a very hostile physical and political environment.
So one has to have at least a grudging admiration for the whole enterprise.
One of the continuous comparisons through the text is between Israel and the United States. Much of this is concentrated on immigration and the military but an aspect that may be overlooked by a casual reader is the business environment that has evolved. The authors claim – and I have no way of testing this – that it is much easier to set up a company in Israel than the US but more importantly, it is much easier to fail and start again.
It is clear that being able to recover from a failure is often the most important part of failure. Sadly many people don’t try because they are afraid of failing so removing a large part of this fear must be an important step in growing an entrepreneurial culture.
Now if that is true comparing Israel to the US, how much truer would it be compared to the UK? Because companies in the US can file for Chapter 11 protection under Federal law and carry on trading – it can even be used by individuals. It may be a more expensive and public option but there are many cases where a company has traded itself out of difficulties, thus saving jobs and keeping work flowing.
In the UK, while there are moves afoot to simplify the procedure, bankruptcy (insolvency for companies) is still a more protracted process yet there is much less time available. There is also a certain stigma associated with being bankrupted, and even more so in other parts of Europe.
The difference was most marked over the largest ever bankruptcy in the US, that of Lehman Brothers in 2008 just a week after the ‘nationalisation’ of Fannie Mae and Freddie Mac mortgage providers. Barclays and BoA walked away from a rescue, although with Nomura, they cherry-picked what they could.
What a week! If you remember, Lehman’s incurred huge losses in the sub-prime mortgage crisis and filed for bankruptcy citing overall debts of some $129 billion, and that assumed the assets were sound. Uncle Sam was not prepared to cover so in the alleged words of President Bush – let the sucker go! And it went.
Whereas the parent company in New York filed for Chapter 11 protection, no such facility was available to its subsidiary in the UK. Lehman UK had to be wound up literally over the weekend. Money had been sent to New York on the Friday to be repaid on the Monday – except it wasn’t. So traders had positions that could not have been realised. Overnight some $8 billion was taken out of the London market which froze inter-bank lending and the repo market for a long time.
So what can British companies do should they find themselves in difficulties? Well there is a step short of insolvency and being in administration whereby a company can come to an arrangement with its creditors. Rather as individuals can file for an Individual Voluntary Arrangement, companies have a similar facility known as, surprisingly, a Company Voluntary Arrangement (CVA) so all is not lost.
A CVA enables a financially troubled company to come to a binding agreement with creditors about its debts over an agreed period of time. There is a 28 day protection – not as generous as Chapter 11 but better than nothing so it is possible to trade out of the position.
The damage done to the UK and world economy by the shenanagins of Lehmans, Royal Bank of Scotland, HBOS etc has been a breach of trust and this goes back to the willingness of these institutions to lend money and help companies that may be in trouble but have a future. Acceptance of failure, and willingness to help companies and people start over, needs to be part of this process at both personal and corporate levels. Otherwise dreams of evolving an entrepreneurial culture are so much pie in the sky.
What is true for companies is also true for people – we all have to allow ourselves to fail or we’ll be afraid to start anything. Think walking – a process of not falling over. But as babes we continually fall over until we learn. So it is with life and business.
photo credit: Chris Devers via photopin cc
Companies routinely use Chapter 11 to get rid of contracts and other liabilities including union contracts. The auto industry did with the help of the U.S. government. True insolvency is somewhat more rare, but does happen occasionally.
I am sure there is abuse of Chapter 11 which raises the question of why the courts accepted the application. There is of course Chapter 7 insolvency which is more in line with the UK approach but all the same, it is possible in the US to carry on trading which under insolvency is more difficult in the UK – it really depends on the receiver. Having said that, the record label HMV and the video rentals business Blockbuster have recently been down this road and some parts are still trading. But the failure of Lehmans was very dramatic and there was no way the London operation could have been rescued. Lehmans Japan and Lehmans Australia also went down of course.
Great point about the easiness and fallacy of failing and starting again, versus structural implementation in recovery. Is that a Banksy graffiti at the top?
Well spotted, @Mike. It is a Banksy image from Boston, MA but notice the UK spelling of Cancelled!