Classes Of Creditors Research Articles

Transplanting Absolute Priority in Indian Bankruptcy Law: Part I

In 2016, India revamped its bankruptcy legislation and introduced a new framework for resolution of financially distressed businesses. The Insolvency and Bankruptcy Code (IBC) was intended to usher in a new era of efficiency and galvanize India’s ailing bankruptcy regime. The results thus far have been mixed. One of the issues that has frequently arisen under the new regime is how to distribute the resolution proceeds amongst different classes of creditors. The doctrine evolved by courts and tribunals has been to leave any question on distribution to the discretion of the Committee of Creditors – an approach developed to insulate bankruptcy proceedings from excessive judicial interference. In this paper, which will be published across two volumes, I endeavour to show that this approach is flawed and contributes to the systemic problems afflicting the Indian bankruptcy regime. Drawing on doctrine developed in transnational bankruptcy law, I argue in favour of adopting the absolute priority rule as a fixed rule for distribution of resolution proceeds in India, which can augment value maximization and enable efficient resolution of distressed debt. Part I of this paper will trace the origins, evolution and migration of the absolute priority rule in transnational bankruptcy law. Part II, which will be published in the following volume, will make the case for transplanting absolute priority in Indian bankruptcy law.

The invisible leverage of the rich. Absentee debtors and their hedge funds

The existing literature on finance, debt, and inequality depicts economic elites as a creditor class. According to a popular thesis, over the past four decades, the rich and ultra-rich households have experienced a saving glut (excess income), which they have invested in the debts of the poor and their governments. While it is undeniable that the rich have expanded their income share at the expenses of the poor, to refer to them as ‘creditors’ or ‘lenders’ is a misrepresentation of how they actually expand their wealth and income shares by financial means. For it conceals the fact that a great deal of their investments is leveraged, that is, carried out with borrowed money. This article shows that the debts generated for the sake of affluent households easily surpass those of all other households. However, these debts are not accounted for in statistics on household debt. This is because affluent households, particularly multi-millionaires and billionaires inside the top 1%, do not simply borrow from banks, like normal households do, but they are instead absentee debtors who borrow through corporate structures of which they are dominant shareholders and ultimate beneficiaries. To gain an insight into their invisible leverage, the article looks at how much hedge funds borrow and why their leverage matters.

Labor's End: How the Promise of Automation Degraded Work

Labor's End: How the Promise of Automation Degraded Work

Prepacks as a mechanism for resolving financial distress: The evidence

Prepacks as a mechanism for resolving financial distress: The evidence

General Principles of EU Corporate and Insolvency Law

Over more than forty years, the European Union (formerly the European Community) has enacted a large number of directives aimed at harmonising company law rules across Member States. Nevertheless, differences across Member States persist with regard to company law rules. Member States’ regimes share a core of fundamental features: shareholders are not liable for the company's debts; companies have a separate legal personality; and the capital investment is commodified through the vehicle of freely disposable shares. Beyond these fundamental elements, it is more uncertain whether other general principles, having legal relevance, exist throughout the EU. By looking at national company law regimes and EU harmonising directives, this work has isolated only two principles that seem sufficiently general, common, and fundamental. The first principle is the unrestricted powers of directors to act on behalf of the company: this principle is based upon the German tradition and has been extended to public companies of all Member States by the First Company Law Directive of 1968. The second principle is equal treatment of shareholders who are in the same condition: this is a general duty that all companies’ bodies should respect when they make decisions that affect shareholders. Such a principle, however, is not a rigid equality rule, as differentiated treatment might still be justified in the interest of the company. However, its status within case-law of the European Court of Justice it is still unclear: on the one hand, the Court has denied that this duty is a general principle of EU law, with the consequence that it only applies within the scope of the specific provisions entailing this rule; on the other hand, other decisions of the Court seem to follow an opposite logic. Concerning insolvency law, it is much more controversial whether general principles exist within the EU legal order. Insolvency proceedings are country-specific, as most of their rules have a re-distributive impact on a broad range of stakeholders of the company, such as employees, creditors, and customers. Therefore, insolvency regimes are strictly related to political balances and national social security policies. The only common denominator of Member States insolvency regimes seems to be the duty to treat creditors equally and respect pre-insolvency entitlement and creditor ranking. Nevertheless, there is also an intricate web of exceptions to this principle, which vary broadly across jurisdictions and aim at protecting specific classes of creditors.

Reforming Russian legal mechanisms for the rehabilitation of the debtor through the prism of comparative studies

The purpose of this study is to formulate the main elements of the legal model for reforming the Russian insolvency legislation based on the analysis of regulatory decisions of foreign legal orders, where the idea of the sanation of the debtor and its enterprise is successfully implemented. Comparative-legal and sociological methods of scientific cognition were used as a methodological basis. The results of the work were the analysis of the experience of the United States and Germany, the legislation of which contains effective models for resolving the conflict between the debtor and its creditors within the framework of sanation. In addition, the authors formulated and substantiated the conclusion regarding the urgent need to change the Russian concept of insolvency legislation through the transition from the liquidation of insolvent entities, mainly to the sanation of debtors or its enterprises. The authors also proposed key elements of a possible legal model for such reform, including establishing a unified restructuring competitive procedure for debtors – legal entities; preserving the powers of the debtor in the course of this procedure to handle its corporate management; solving the most significant issues of the restructuring procedure mainly by reaching an agreement between the main participants in the procedure – the debtor, the beneficiaries of the debtor and various classes of creditors. The novelty of the work lies in formulating the problem and substantiating the requirement to transform the Russian legal mechanisms for the rehabilitation of the insolvent debtor, taking into account the legal solutions presented, first of all, in American and German insolvency legislation.

The Two Conditions for the Part 26A Cram Down

This article considers the two conditions that must be met before the Court may “cram down” one or more dissenting classes of creditors or members by sanctioning a plan pursuant to Part 26A of the Companies Act 2006 (inserted by the Corporate Insolvency and Governance Act 2020). Condition A effectively requires that only the restructuring surplus — the value likely to be preserved and perhaps created by the implementation of the proposed plan — be in play in relation to a dissenting class which is sought to be crammed down. This constitutes a key safeguard against expropriative redistribution of value from dissenting classes to others. Condition B appears based on but is different from the US Bankruptcy Code provision that the court may only approve a plan if at least one impaired class has accepted it. This article draws out the similarities and differences between Condition B and its US inspiration, then draws on US and UK jurisprudence to show how Condition B may most efficaciously be interpreted. The cram down jurisdiction as a whole and Condition B in particular are open to harmful manipulation in several ways. Both US and UK jurisprudence potentially provides the resources that UK courts will need to counter such manipulation.

Determinants of Delays in Corporate Reorganizations

Purpose – Firms and creditors may delay certain decisions in corporate reorganizations because of actions that require coordination. This paper investigates delays in voting on reorganization plans during claimholder general meetings in Brazil. Design/methodology/approach – Using a sample of 120 hand-collected reorganization plans, we present descriptive and regression (OLS, Poisson, negative binomial, and quantile) analyses to show the primary characteristics of delayed votes. Findings – Our results revealed that a high concentration of debt among the different classes of claimholders appeared to be related to fewer delays. Moreover, a higher number of banks and secured creditors with claims in the reorganization appeared to be positively correlated with delays. Finally, we argue that reorganization plans that require additional time to reach a vote are related to divestment proposals. Originality/value – There is still a lack of empirical results based on evaluations of multiple creditor characteristics and the reorganization proposals presented in firms’ reorganization plans. This is the first paper in Brazil to explore how conflicts of interest among different classes of creditors may relate to delays. Our paper contributes to the literature developed by Gilson (1990), Gilson et al. (1990), Brown et al. (1993), Franks and Tourus (1994), Helwege (1999), Ayotte and Morrison (2009), Ponticelli (2012), and Ivashina et al. (2015) regarding the characteristics of delaying reorganization plan votes during restructuring cases. We corroborate the results obtained by previous papers and provide an analysis of the role played by each class of claimholder in delaying plan votes for Brazilian firms

기업구조조정촉진법상 반대채권자의 채권매수청구권의 문제점과 영국의 정리계획(SoA)식 조별 결의 도입 제안

기업구조조정촉진법상 반대채권자의 채권매수청구권의 문제점과 영국의 정리계획(SoA)식 조별 결의 도입 제안

A Game Theoretic Analysis of the Relative Payouts to Operational Creditors and Financial Creditors from Bankruptcy Resolution in India

Abstract This paper analyses the outcomes of the cases resolved under Insolvency and Bankruptcy Code of India to examine the treatment of admitted claims for the two main classes of creditors i.e. operational and financial creditors. It shows that, at an aggregate level, operational creditors and financial creditors realize an equal percentage of their claims. However, at an individual level, there is wide heterogeneity in the treatment of the two classes of creditors. Three benchmark division rules – Proportional division, Constrained Equal Losses and Constrained Equal Awards, are used to characterize the actual divisions in each case. This analysis allows us to hypothesize that when aggregate claims of operational creditors are tiny, the Constrained Equal Awards (that is extremely generous to small creditors), does well. When aggregate claims of operational creditors are large, the Proportional rule does well. But when the claims of operational creditors fall in an intermediate range, the Constrained Equal Losses rule which is most unfavourable to the operational creditor comes to the fore. Hence, some broad guidelines that can be applied on a case by case basis appear to be desirable.

The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act

In late 2019, Congress enacted the Small Business Reorganizations Act. The Act’s timing is fortuitous: Weeks after it went into force in February, 2020, the Covid-19 pandemic damaged countless small businesses—enterprises that the Act may provide an opportunity to save. The Act provides businesses with powerful options to reorganize under a new “subchapter V” of Chapter 11 of the Bankruptcy Code. Subchapter V eases the requirements for confirmation of plans that creditors don’t approve by simply requiring debtors to project their “disposable income” and pay it to creditors for three to five years; provides incentives for the parties to reach agreement on reorganization plans; lowers the debtor’s disclosure obligations; eliminates the regular appointment of an official committee of creditors; requires the appointment of a trustee to aid in plan negotiations; and permits modification of loans secured by a mortgage on a debtor’s primary residence.Creditors will have to develop a new playbook for subchapter V cases. Most scholarship has emphasized debtors’ new options, but this Article presents an analysis from the perspective of creditors. Of course, creditors are not created equal; strategies will only be useful to creditors with claims substantial enough to justify the investment of time and money. Well-positioned creditors will extract whatever strategic gains they can at the expense of the debtor and of less privileged creditors. The game is multilateral, not simply creditor vs. debtor. The Article suggests strategies for variously positioned creditors to protect their interests.The Article suggests seven major strategies: 1) Creditors should seek influence or control a debtor’s entry into subchapter V by making agreements with debtors concerning the election, using financial maneuvers to work around subchapter V’s debt limits, or challenging the debtor’s eligibility for entry.2) Creditors should monitor and make use of trustees as circumstances warrant, whether by cultivating and working closely with them, by seeking to minimize their role and save expenses, or, at the extreme, by opposing them and seeking their removal. 3) To combat debtors’ tendency to delay, creditors should apply pressure on the debtor by emphasizing the statutory emphasis on speed, scrutinizing the debtor’s required disclosures, and enlisting the trustee and court where possible.4) Creditors should avoid holding general unsecured claims, and, if eligible, should take the election offered by §1111(b) of the Code. 5) Subchapter V places a premium on plans being approved by creditors, so those whose votes are needed for confirmation should extract concessions in exchange for their vote. For those privileged creditors, this should be a major point of leverage.6) Creditors should look to obtain information at every opportunity, including at the required meeting of creditors and status conference early in the case, in the disclosures and filings made by the debtor, and through formal discovery. 7) Creditors extending credit secured by a residence should designing lending practices to ensure that they cannot be “modified” by debtors in bankruptcy. Many of the strategies above will be of keen interest to secured and other privileged classes of creditors. The Article predicts that with these and other strategies in hand, such creditors will not lose much ground under subchapter V. But the law lowers protections for general unsecured creditors, particularly those who remain passive. A number of the strategic tools presented in this Article can aid disfavored general unsecured creditors as well—but frequently, they will have too little at stake to make it worth putting their energy into the new small business bankruptcy game.

Is the Relative Priority Rule right for your jurisdiction? A simple guide to RPR

The Directive (EU) 2019/1023 on Restructuring and Insolvency provides for a new rule to assess the fairness of the distribution of value under an accepted plan if an affected class of creditors voted against the plan: the European Relative Priority Rule (RPR). At the same time, the Directive allows Member States to adopt a US-style Absolute Priority Rule (strict APR) instead, but mandates exception to this rule (relaxed APR). As a result, all Member States are faced with the choice of either implementing the default RPR option or a version of the APR with more or less exceptions when implementing the Directive into their local restructuring laws. German and Dutch legislation provide first examples of the degree of variations. While APR is a concept that has been a part of US law for 80 years and German law for 20 years, the idea of an RPR is not just new. It has also not yet been explained extensively by scholars. If Member States consider implementing such a concept, they should know how it works. The following quick guide aims at providing this assistance.

The Restructuring Directive: a Functional Law and Economics Analysis from a French Law Perspective

From a law and economics perspective, the existence of insolvency law is justified insofar as it is necessary for ensuring orderly and efficient coordination and negotiations between the stakeholders in case of a debtor’s economic or financial distress. The so-called restructuring proceedings are no exception. They should, therefore, help identify and distinguish viable and non-viable businesses and facilitate the operational and financial restructuring of the former where an added value to the benefit of all the stakeholders is expected compared to their immediate liquidation. In this respect, the recent Restructuring Directive is somewhat disappointing. Its final text bears the marks of the divergent perspectives and objectives pursued by its different drafters: the preservation of the debtor’s company at all costs, or the maximisation of the value of the debtor's assets in the interest of all of its stakeholders. The resulting text lacks, therefore, a coherent conceptual foundation, and should be understood as proposing several distinct types of proceedings. Nevertheless, the Restructuring Directive introduces some major innovations for preventive restructuring proceedings, both with respect to the approval of restructuring plans (vote of the plan by classes of creditors, possibility of a cross-class cram-down, treating shareholders as a class of creditors in order to facilitate debt-equity swaps) and to the protections afforded for the benefit of stakeholders (best interests of creditors test, priority rules). However, the puzzling variety of diverging options for the transposition of these measures requires legislators to seek clear guidelines in order to build the national preventive restructuring proceedings on coherent foundations, even where they are all but absent at the European level. The purpose of this paper is threefold. After a brief introduction in Part I, Part II provides the general conceptual framework of our analysis, largely based on what will be called a ‘functional’ law and economics approach, which starts with an epistemic concern with the conditions under which the decision on the reallocation of resources is to be taken. These conditions depend, in turn, on the realities of debtors’ access to finance in the relevant market. Practitioners more interested in the Restructuring Directive in itself could skim through Part II and focus on Part III of the paper, which provides an analysis of the different models hidden in the Directive, their respective objectives and most important measures (statutory moratoria, decision-making, protections of stakeholders’ interests), including a comparison with current French pre-insolvency proceedings. Finally, Part IV addresses some issues specific to the transposition of the Directive into French law, especially the need to increase the transparency and predictability of current proceedings in order to foster bonds and secondary debt markets. Indeed, the existence of such markets appears to be necessary if the proceedings are to function properly. This paper is up to date as of October 2019.

Bankruptcy: What is left for the creditors? A Belgian exploratory study

AbstractIt is sometimes alleged that in cases of bankruptcy, there is often not much left for the creditors, especially for the ordinary unsecured creditors. This article examines, in an exploratory way, what the different classes of creditors, depending on their priority position, recover in cases of bankruptcy in Belgium, by investigating a sample of 286 bankruptcy files from the Commercial Court of Ghent (Belgium's second largest city). This article also explores what impact some existing proposals to improve the position of ordinary unsecured creditors in the event of bankruptcy would have had on the bankruptcy cases studied.

Differential Treatment Among and Within Classes of Creditors Under the Insolvency and Bankruptcy Code, 2016: Issues and Suggestions

C. Scott Pryor and Dr. Risham Garg, have undertaken a multi-pronged project to understand certain aspects of the implementation of India’s new Insolvency and Bankruptcy Code, 2016 (“IBC”). Their efforts have included a questionnaire emailed to a large number of Resolution and Insolvency Processionals as well as interviews of Resolution Professionals, Insolvency Professionals, attorneys, representatives of several of the Insolvency Professional Agencies, and officials of the Insolvency and Bankruptcy Board of India. Pryor and Garg have identified several problematic developments as a result of their research that in turn have led them to three preliminary conclusions: 1. Vesting near-plenary control of the Corporate Resolution Insolvency Process (CIRP) with a Committee of Creditors composed of only financial creditors leads to a perception of inequitable distributions between the class of financial creditors and the class of operational creditors. 2. The CIRP provisions of the IBC may be inconsistent with public policy because they have been construed to fail to protect vested charges that secured creditors may have against the property or assets of the corporate debtor. 3. The CIRP provisions and accompanying regulations fall short of the standards of procedural fairness. In addition to conducting additional empirical research to test their preliminary conclusions, Pryor and Garg suggest that the CIRP Regulations be revised to provide that: (i) the any resolution plan provide for the value of the secured claims of holders of registered charges in assets of the corporate debtor; (ii) any resolution plan disclose the bases for the allocation of value within the class of financial creditors and between the classes of financial and operational creditors; and (iii) the Committee of Creditors provide reasons for any deviation from the norm of equitable distribution of any residual enterprise value among financial and operational creditors.

Differential Treatment Among and Within Classes of Creditors Under India's New Insolvency and Bankruptcy Code, 2016: Issues and Suggestions

Differential Treatment Among and Within Classes of Creditors Under India's New Insolvency and Bankruptcy Code, 2016: Issues and Suggestions

Standards for Rescue Financing Under Singapore Schemes of Arrangement: Re Attilan Group Ltd

Singapore’s ambition to strengthen its role as a regional insolvency restructuring hub prompted the financial centre to enact several reforms to the domestic insolvency regime, adopt the UNCITRAL Model Law on Cross-Border Insolvency, and establish the Judicial Insolvency Network through which judges from 10 jurisdictions met to develop guidelines on establishing protocols for court-to-court communication in insolvency proceedings. The most significant amendments involve incorporating characteristics of US Ch.11 proceedings into domestic schemes. These include an automatic moratorium that can be extended to have a worldwide effect on parties falling within the court’s personal jurisdiction, cram-down of dissenting classes of creditors, and rescue financing. Under the amended Companies Act, a company seeking to convene a creditors’ meeting regarding a proposed scheme may also apply for priority status for rescue financing. There are four levels of priority status permitted under s.211E(1). These include treating the rescue financing as an expense of the winding up in any subsequent winding up, giving the claim priority over unsecured and preferential claims in any subsequent winding up, granting a secured interest against the debtor’s property that is subordinate to any existing security against that property, or providing the rescue financing a secured status equal to or higher than an existing secured interest on the debtor’s property.

Parallel Reorganizations under the Recast European Insolvency Regulation – Selected EU Law Issues

AbstractThe Recast European Insolvency Regulation (EIR) (Regulation 2015/848) repealed the rules in Articles 3(3) and 27 of the original EIR (Regulation 1346/2000) that required that secondary insolvency proceedings take the form of a liquidation (winding‐up). As a result, European debtors may now attempt to resolve their cross‐border insolvencies via parallel reorganization proceedings conducted both in the Member State of the debtor's centre of main interest and in one or more Member States in which the debtor possesses an establishment. This article aims to take account of the principal rules of the Recast EIR which, in addition to the national laws of the Member States involved, will regulate such attempts. Upon the review of these selected rules, the article concludes that, in principle, the Recast EIR provides EU debtors with a feasible cross‐border platform to reorganize in more than one Member State in parallel. However, the article finds that a particular rule central to the system of cross‐border insolvency under the EIR, namely, Article 45, which allows the multiple filing of claims in all proceedings conducted in respect of the debtor, has the potential to frustrate attempts at parallel reorganizations. This is particularly so where the cross‐filing rule combines with Member State law that is rigid as regards plan approval by creditor classes or minimum payouts to certain classes. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.

Bondholders vs. Retirees in Municipal Bankruptcies: The Political Economy of Chapter 9

Financially distressed U.S. municipalities may be eligible for federal bankruptcy protection under chapter 9 of the Bankruptcy Code. These municipal debtors tend to be burdened by the claims of two large classes of creditors: bondholders, on the one hand, and beneficiaries of underfunded retirement plans, on the other. In recent high-profile chapter 9 cases, U.S. Bankruptcy Courts have clarified the legal rights and entitlements of these two types of claimants, paving the way for insolvent cities to use bankruptcy to restructure both bond and pension obligations. Notwithstanding these judicial pronouncements, bankrupt cities have mostly declined to use chapter 9 to adjust their pension promises, instead advancing plans of adjustment that privilege pension claims over all others. This Article constructs detailed case studies to challenge the assumption that employee-centric principles of fairness and equity are driving case outcomes. Rather, the political economy of chapter 9 has enabled large and prominent pension administrators to exert more power and influence over restructurings. Meanwhile, it is not clear that these outcomes actually serve employees’ and retirees’ broader economic interests, as the prototypical municipal bankruptcy restructuring still exacts a heavy toll on past, present, and future city workers and taxpayers. Reforms are needed to both preserve the integrity of the municipal bankruptcy process and better safeguard the interests of employees and retirees.

Corporate restructuring: empirical evidence on the approval of the reorganization plan

When a corporation presents a reorganization plan, it expects its creditors to approve the plan. This paper provides empirical evidence regarding the likelihood of approval based on reorganization plans for creditors in Brazil that require approval by employees; and by secure and unsecure debtholders. This paper involves a descriptive analysis of the main characteristics of reorganization plans by type of vote. Using a sample of 120 reorganization plans proposed by corporations from 2005 to 2014, we find that the labor class of creditors is likely to approve the reorganization plan even when the plan is rejected; plans with more heterogeneous payment for classes are less likely to be accepted; plans are less likely to be accepted when there are more unsecure creditors; and plans with divestment proposals are more likely to be accepted. Finally, as expected given the seniority position of secured debt, plans are less likely to be accepted when the portion of secured debt is higher, and the reverse is true for unsecured debt.