Bankers and financiers, not lawyers, are the true professionals when it comes to the health of troubled firms
Allowing troubled companies to seek a court order to keep creditors at bay is a straight bad idea
Hong Kong’s slip to fifth [in a World Bank survey] was mainly because of a lower score in “resolving insolvency” ... for the corporate sector, a government spokesman said.
He said the government would review the insolvency policy from time to time for more effective processing of winding-up cases and better protection of creditors.
SCMP, November 2
I did a double take when I read this the first time. Government seeking better protection of creditors? When bureaucrats take an interest in these matters they invariably seek better protection from creditors.
We shall put this anomaly down to a misapprehension somewhere along the line as the measure our bureaucrats now wish to adopt is a straight copy of the American Chapter 11 system. This, as an alternative to bankruptcy, allows troubled companies to seek a court order to keep creditors at bay.
I think Chapter 11 is a straight bad idea.
Just for starters, I am personally in the net creditor ranks. I have bank deposits and I hold corporate bonds in my investment portfolio. That’s my money we are talking about here.
And to put it in straight selfish terms, if I have made a dubious choice among the companies in whose debt I have invested then I prefer arrangements that may return me 80 cents in the dollar when all is resolved rather than the 30 cents I am more likely to get with Chapter 11 delays in winding up a failure.
Do you really take a different view of these things with your own money?
Yes, I know insolvency lawyers say it is unfair that one single unpaid creditor can take a company down and that there are many cases in which normal bankruptcy proceedings kill off companies that still have a good chance of surviving.
Leaving aside, however, that insolvency lawyers can hardly have a disinterested opinion of measures that create more insolvency work, I prefer the judgment of bankers and financiers.
They are the true professionals in these matters. Lawyers tend to think that law and government are the same thing. In this conceit they then line up to become politicians and dispense rules on things they don’t really understand.
As much to the point, corporations are not humans. No-one dies when companies are killed off. All that happens is that enterprises run badly or in hopeless lines of business are forced to go out of business, which is often a mercy to the people involved. It also means economies can recover more quickly from a slowdown.
And, no, I do not think it unfair that a single creditor can take a company down. If a company cannot pay one debt, then it very likely cannot pay any other. But here is the test. Let that company find another creditor to buy the first one out. It won’t take long if the company’s credit is sound.
I concede that the problem may only be one of temporary illiquidity rather than insolvency. But illiquidity is a blind behind which all insolvent debtors hide. Once again I prefer the judgment of financiers. They are better at recognising true illiquidity. They invariably tide it over with an infusion of liquidity when they see it.
In the end, however, this is a matter of what measures society wants for the price it is willing to pay. There is a cost to Chapter 11 rules as there is to even limited liability. It is paid by the debtor through greater difficulty in raising money or higher interest rates on his debt. If you want more protection you must pay for it.
I only wish that this price tag was occasionally displayed on creditor costly measures like Chapter 11. Yes, it would be difficult to assess exactly what it is in each case but I wonder how many people would be prepared to pay it if they really knew what it is.
I am certain, however, that the bureaucrat heavy World Bank does not know ... or care.