Reward for failure?

David Cameron has brought forwards proposals for a Chapter 11 in Britain. This is a system used in the USA whereby a company which is in danger of failing can apply to the court for protection from its creditors while it digs itself out of a hole.

The proposal has met with a raft of criticism. The pro-Cameron Spectator is against it, together with a large number of economic libertarians. Their reasoning is that in the business law of the jungle failures must be allowed to fail. Chapter 11 has propped up the failing US airline industry and it is hard to see where this has been a success. In the UK the creditor which most often pulls the plug is HM Revenue and Customs (I seem to remember from my time at the coalface that the VAT were considerably more unpleasant than the old Inland Revenue). Thus Ch 11 could be seen as a Government subsidy to a failing business. Others point to the fact that in the US unscrupulous entrepreneurs have used the system to avoid paying their employee’s pensions.

And yet...In the UK there is a certain stigma about going bust, a puritan, Victorian idea that you must have cheated someone: we have seen examples in Dickens and Trollope. In America, however, whilst not quite a rite of passage, no stigma attaches; something went wrong – perhaps out of the control of the managers (oil prices? An unnecessary recession?) - and you should have a chance to put it right if you know how to. The result is that Americans are more prepared to take risks and their economy is healthier, more entrepreneurial, than ours or Europe’s. And it must be pointed out that in Britain, when a company goes bust, the State creditors, Corporation Tax, VAT, Business Rates etc rank ahead of ordinary creditors. The State is given first feed at the corporate corpse, often resulting in nothing left for the others. There’s a market distortion, if you like.

This is an idea not without merit. As it is refined into a detailed policy, Cameron needs to make sure he has adopted the best of the American system and ditched the worst. The company would need to show that there is some overall benefit in it continuing, particularly under the previous (failed) management, and its plan for recovery must be rigorous. And there must be time limits. I hope we see a more detailed outline in the months to come.