Proposed Recommendations for the Reform of Chapter 11 U.S. Bankruptcy Code

Abstract

The US Bankruptcy Code’s chapter 11 procedure is both in practice and conceptually the most important insolvency procedure worldwide. Many countries, including the Netherlands, look at Chapter 11 for inspiration in revising their own insolvency laws. Chapter 11 is, however, itself up for revision. On December 4, 2014, the American Bankruptcy Institute (ABI) issued breaking news for the restructuring and insolvency community in the USA when it presented its Final Report and Recommendations on the Reform of Chapter 11. This article discusses the most principled recommendations that will also be of the most relevance for legislatures and policy makers drawing inspiration from Chapter 11. First of all, the recommendation is discussed for introducing the figure of a so called ‘estate neutral’ as a supplement to the debtor in possession model. Secondly, the introduction of significant restrictions on 363 sales; selling all or nearly of the assets. Restrictions deal both with timing and creditor involvement. As a third recommendation, we single out the introduction of a so-called ‘redemption option’. This option seeks to restore in part the balance between secured and unsecured creditors by giving ‘the immediate out of the money creditors’ a claim on encumbered assets equal to a redemption option. Finally, most novel and most interesting from a company law perspective, is the introduction of an Equity Retention Plan for Small and Medium sized Enterprises (SME’s). The plan seeks to strike a balance between protecting the statutory order of distributions which would normally prevent a distribution to shareholders on the one hand and providing an incentive to shareholders necessary for the successful reorganisation of the company to remain involved on the other. This recommendation thereby provides an exception to the Absolute Priority rule, which usually has as the effect of wiping shareholders out in case of insolvency.