29 - Lessons from a comparison of U.S. and U.K. insolvency codes

Summary

Introduction

This chapter describes two insolvency codes, those of the United Kingdom and the United States, and appraises their efficiency against a number of benchmarks.

The principles underlying the two systems differ in some fundamental respects. The main objective of chapter 11 of the 1978 U.S. Bankruptcy Code is to maintain the business as a going concern, even if that reduces the proceeds available to creditors. As a result, the Code has deliberately been designed to be highly debtor-oriented. Substantial rights are given to the board of the company to continue running the business while a reorganization plan is being constructed. In contrast, the main objective of the U.K. Code is the repayment of creditors' claims. As a result, the United Kingdom has had, at least prior to 1986, a highly creditor-oriented code. Under this Code, the company immediately comes under the control of an insolvency practitioner who represents the interests of creditors and, in some cases, only secured creditors. The concern expressed about the U.K. system has been that it reduces the value of the company by encouraging its premature liquidation. The introduction of administration in the 1986 Insolvency Act was designed to move the U.K. Code towards a debtor-type system; it is, therefore, sometimes referred to, incorrectly as we shall argue, as the U.K. equivalent of chapter 11.

International comparisons should be of interest on a number of accounts.