US companies have used bankruptcy to shed jobs and scrap wage agreements.
There is an ever present danger that the Conservative government will erode worker’s rights and cheapen labour.
It does not have to mount an open challenge to workers and trade unions as the same can be achieved in numerous other ways.
One of these is the Corporate Insolvency and Governance Bill currently going through the UK parliament.
On the surface, the Bill is about rescuing financially distressed companies and jobs, but it will have severe effects on pensions, wages and employment conditions too.
The UK Bill enables companies to restructure their liabilities and remain in business under the same management.
To do so, the company would need to prepare a restructuring plan which can also be prepared by management, shareholders and/or creditors.
The most pressing need is to improve corporate liquidity and reduce pressure from creditors.
So the Plan may ask bondholders to convert their debt to equity or ask creditors to accept less than what they are actually owed.
The alternative may be bankruptcy or possible sale of the business which may have adverse consequences for creditors.
The legislation effectively permits management to use likely bankruptcy as a strategic tool to squeeze concessions out of its creditors.
The Plan needs to be supported by a minimum of 75% of creditors in value for each class of voting and must be approved by the court.
Once approved, it is binding on all creditors, including the dissenting creditors. That includes pension schemes with deficits.
Some jobs may be saved at the restructured company, at least for a short period, but pension rights of current and past employees may be permanently eroded.
Even if the pension scheme trustees object, they are unlikely to be able to muster sufficient voting power, relative to other creditors, to defeat an adverse restructuring plan.
In practice, there may be discussions with the Pensions Regulator, but the legislation does not provide any parameters for that discussion.
In the event of business bankruptcy, a pension scheme in deficit may be bailed out by the Pension Protection Fund, which is restricted to a maximum of 90%, but there is little clarity about the fate of the deficit for a restructured ongoing business.
The fact that a company is seeking to restructure is in itself evidence of poor management, products/services and innovation.
But there is no clawback of executive pay or bonuses. The restructuring entity is not required to put a brake for a specified period on future executive pay, dividends or share buybacks either. There is no specific requirement to hold discussions with past and present employees.
The UK legislation is modelled on a part of the US bankruptcy law, popularly known as Chapter 11 legislation.
The legislation has enabled some companies to reorganise themselves and survive, but it has also been used for trade union busting, firing and rehiring workers on lower wages and inferior working conditions, and expansion of job insecurity through zero hour contracts.
Bankruptcy generally negates free collective bargaining agreements with trade unions. Many US airlines have voluntarily entered bankruptcy to jettison wage agreements and shed jobs.
A study of the strategic bankruptcy of American Airlines noted that “labor groups at the airline realized losses aggregated together between 60-70%. At the same time, equity and bond holders profited 2.5 to 7 times”. General Motors used Chapter 11 to shed thousands of jobs and reduce wage rates by between 3%-10%.
The above is possible in the UK, especially as due to lack of representation at company boards, employees have little chance of shaping the terms of restructuring.
Schedule 9 of the legislation being rushed through parliament states that restructuring is open to any company which “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.
So the gates for strategic bankruptcies are wide open. Under this, a company like Carillion, with a track record of excessive executive pay, high dividends, higher debt and pension scheme deficit could restructure itself at the expense of creditors, workers’ wages and pension rights.
There is no limit to the number of times this can be done as long as creditors, shareholders and management are willing.
The legislation introduces moral hazards and invites directors to indulge in higher executive pay and dividends and neglect employee obligations with the full knowledge that business can be restructured and pension liabilities can be dumped. It also enables them to walk away from free collective bargaining agreements.
The biggest winners from the legislation will be shareholders whose shares would become more valuable, followed by bondholders who will see an increase in price as the company’s ability to service its bonds rises.
Faced with the threat of bankruptcy and loss of jobs, many workers may accept the terms offered by restructured companies in the form of lower wages and inferior working conditions, leading to insecurity. The legislation poses a challenge to industrial relations and trade unions need to act before the Bill becomes law.
Prem Sikka is a Professor of Accounting at the University of Sheffield and an Emeritus Professor of Accounting at the University of Essex.
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[…] than checking the above practices, the government is facilitating them. On 3rd June the Corporate Insolvency and Governance Bill was rushed through the House of Commons, with minimal […]