Cramdown, reorganization bargaining and inefficient markets: The cases of the United States and China

Abstract

AbstractThe cramdown rule (11 USC s 1,129(b)) originates from the U.S. 1978 Bankruptcy Code as an innovative mechanism. The cramdown provision is rarely used in judicial practice in the United States. However, it is a key rule to understand the parties' bargaining structure. The inactive cramdown provision yet has been widely transplanted into other jurisdictions, including China. Little literature exists to explore the economic rationale of cramdown provision mainly because of its inactiveness in practice. This research explores the economic function of the cramdown provision in an inefficient market, using the cases of United States and China. This research observes that the cramdown provisions can only effectively function with the essential conditions and elements, such as the Best Interests of the Creditors Test, good faith, feasibility, fairness and equitability as well as the absolute priority rule. Therefore, the partial transplantation of the cramdown provision might not be effective.