Could Chapter 11 be coming to Britain?

Given the current state of the economy and phrases like “Credit Crunch” being mentioned as well as rumours of a looming, full blown recession I was glad to see that the Richard Report is looking for ways to help small businesses and entrepreneurs with a number of recommendations to the government.

Parliament’s Business & Enterprise Committee includes Doug Richard (the author of the Richard report) along with James Caan and Rachel Elnaugh, and although criticised for having sympathies with or involvement in failed businesses in the past, it is obvious that they know what difficulties small business owners encounter in their day-to-day business lives.

The committee made a number of recommendations including:-

Enterprise skills being woven into the education curriculum to encourage entrepreneurism and formal enterprise qualifications to be sponsored by the government to encourage banks and other backers to more more willing in financing individuals if they see they have had proper business training.

They also commented on the need for government not only to open procurement to small businesses but to provide encouragement through incentives where entrepreneurs can create new products or services to solve areas of concern in the UK. It was also recognised that the the role of banks needs to be reviewed. All too often start up businesses are not given the support they need and should consider other options rather than “Pulling the Plug” when a small business comes into difficulties. it was suggested that they should be made as culpable as a companies directors in any post business failure review performed by DBERR.

The Enterprise Investment Scheme (EIS) being improved to give bigger tax breaks for people funding small business. Thatchers Business Expansion Scheme gave investors 100% tax relief for investment into small business in the past and the committee thought this should be a consideration in the future.

It was recognised that our attitude towards failed businesses was still very different to that of the US. In the UK a failed business carries a certain stigma where in the US failure is regarded as losing “Your Business Virginity”. The committee thought we could learn from the US system with Chapter 11 and safeguarding a persons home in the event of a business failure being considered.

Chapter 11 is a chapter in the US bankruptcy code. It allows a company in the US to reorganise their affairs. Chapter 7 of the code enables a company to cease trading and a trustee sells the companies assets with the funds being distributed amongst its creditors. Chapter 11 allows an attempt to stay in business while the bankruptcy court supervises a reorganisation. The rationale behind this is that in some cases a business is worth more is greater if reorganised and sold as a going concern than if it is reduced to the value of its remaining assets.

Some criticism has been aimed at the chapter 11 system, saying that it is a lenient “escape hatch” that encourages incompetent management an easy way out when encountering difficulties and damaging the efficiency of the US economy by allowing poor managers to continue in their roles. These same critics have noted that bankruptcy laws in Europe are far less lenient for failed businesses.

Whether all of the committee’s recommendations are taken on board, it can only be seen as encouraging that key members of the committee come from a truly entrepreneurial background with James Caan and Rachel Elnaugh (Who have both experienced business failure in the past) having key input from the point of view of the business owner.

Rachel Elnaugh is giving regular updates on her blog and will be contributing to Million Impossible’s online magazine which will launch with its first edition in the middle of August.

Regards Bradley

Thread written by Colin Stroud