Corporate Bankruptcy Law Research Articles

The Need for Dignitary Justice for Tort Creditors in Chapter 11 Bankruptcy

With increased frequency, mass tortfeasors are turning to Chapter 11 to address their liabilities, dragging enormous numbers of tort victims into bankruptcy court with them. These individuals deserve fair and dignified treatment. Indeed, if we care about people’s experiences within, and the public’s trust in, the bankruptcy courts, such treatment is essential. Yet contemporary corporate bankruptcy law and literature leave little room for dignitary concerns. This Note aims to highlight the system’s shortcomings and suggest low-cost interventions which would restore dignity to tort creditors.

Insolvency and Bankruptcy Code 2016: revisiting with market reality

PurposeThis paper aims to revisit the Indian experience on corporate bankruptcy law to answer “why Indian corporate insolvency law structured differently from a manager-driven (pre-Insolvency Code) to manager-displacing model (post-Insolvency Code)?”Design/methodology/approachThis paper is qualitative in nature. The paper analyses the prevailing theoretical wisdom in corporate insolvency law in India and examines the practices of Indian bankruptcy regime.FindingsThe authors argued, considering the corporate ownership composition, the Insolvency and Bankruptcy Code 2016 will not accomplish the intended objective (i.e. the “creditor primacy”). The findings refute with the evolutionary theory, i.e. debt and equity both will tend towards dispersion in outsider system of governance.Originality/valueThis paper put forward the imprint that Indian corporate insolvency regime is manager-displacing under Law on Books and manager-driven under Law on Practice.

The Corporate Bankruptcy Substitute in China

Fair distribution in judgment execution generally served as the de facto bankruptcy substitute from the 1980s to 2015, a time when the China Supreme People's Court partially abolished this regime in an effort to nudge more commercial judgment executions into formal bankruptcy procedures. As will be reported later in this article, in view of the insurmountable barriers to commence corporate bankruptcy procedures, even after 2015, courts still use fair distribution to pragmatically solve equal treatment between competing creditors. However, there is little research on fair distribution in judgement execution as a bankruptcy substitute in China, although there has been significant academic study of China's commercial judgment execution system per se, notably by Professors Donald Clarke, Randall Peerenboom, and He Xin. To fill this gap, this article generally asks one simple question: Is fair distribution in judgment executions effective in filling the gap left by the virtual absence of bankruptcy law in China? Under this general question, there are many specific questions that need to be answered. For example, how often is fair distribution used in the event of the bankruptcy of execution debtors? Are execution creditors treated well under the fair distribution scheme? And if not, what factors hamper the application of fair distribution? Is it the lack of bankruptcy filings, as argued by many court officials in China, the cause of the meagre use of the corporate bankruptcy law?

A Structured-Renegotiation Theory of Corporate Bankruptcy

A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer—known as the Creditors’ Bargain Theory—identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors’ nonbankruptcy entitlements. This Article challenges the Creditors’ Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution. In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place guardrails that give the parties room to bargain while keeping them from engaging in extreme forms of hold up. While this framework is not based on any hypothetical ex ante bargain and gives no special deference to nonbankruptcy entitlements, it is the fundamental attribute of Chapter 11.

Finding our way: secured transactions and corporate bankruptcy law and policy in America and England

ABSTRACTThis article is concerned with debate in England as to whether English law has tipped too far in favour of promoting corporate bankruptcy law’s policy concerns to the detriment of an effective secured transactions law regime, and debate in America as to whether reform to secured transactions law has tipped too far in favour of secured transaction law’s policy concerns to the detriment of an effective corporate bankruptcy regime. Through a detailed analysis of the evolutionary history of secured transactions and corporate bankruptcy law and policy in both America and England, the article analyses why each jurisdiction approaches balancing the policy objectives in a fundamentally different way, and the role which the very different institutional environments in corporate bankruptcy have played in mediating between them. It argues that this legal and institutional evolutionary history suggests relatively modest ongoing reform in both jurisdictions, closely adapted to local conditions.

Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations

We apply prospect theory to explain how personal and corporate bankruptcy laws affect risk perceptions of entrepreneurs at time of entry and therefore their growth ambitions. Previous theories have reached ambiguous conclusions as to whether countries with more debtor-friendly bankruptcy laws (i.e. laws that are more forgiving towards debtors in bankruptcy proceedings) are likely to have more entrepreneurs, or whether, creditor-friendly regimes have positive effects on new ventures via enhanced incentives for the supply of credit to entrepreneurs. Responding to this ambiguity, we apply prospect theory to propose that entrepreneurs do not attach the same significance to different elements of bankruptcy codes—and to explain which aspects of debtor-friendly bankruptcy laws matter more to entrepreneurs. Based on this, we derive and confirm hypotheses about the impact of aspects of bankruptcy codes on entrepreneurial activity using the Global Entrepreneurship Monitor combined with data on both personal and corporate bankruptcy regulations for 15 developed OECD countries. We use multilevel random coefficient logistic regressions to take account of the hierarchical nature of the data (country and individual levels). Because entrepreneurs and creditors are sensitive to different elements of the codes, there is scope for optimisation of the legal design of bankruptcy law to achieve both an adequate supply of credit and to encourage high-ambition entrepreneurship.

Small Business Bankruptcy

Bankruptcy is the legal process by which financially distressed firms and individuals resolve their debts. It is an important part of the legal environment for small business owners and their lenders because small businesses are very risky and often fail and because bankruptcy law affects how business owners and their lenders are treated in the event of failure. Both personal and corporate bankruptcy law are relevant for most small businesses, as even when businesses are incorporated, lenders often require that business owners personally guarantee loans to the business. This article discusses theoretical models and empirical tests of how bankruptcy law affects small business, including the effects of bankruptcy law on incentives to start and remain in business, how bankruptcy law affects small business credit, and whether bankruptcy law leads to efficient decisions concerning whether failing businesses reorganize or liquidate. Research using small business data from both the United States and other countries is covered in this survey.

Rethinking Corporate Bankruptcy Theory in the Twenty-First Century

Adopting a comparative UK/US approach, this article argues for the need to rethink corporate bankruptcy theory in the light of developments in the finance market. It argues that these developments have produced an effective mechanism, in large cases, for selecting between companies which will be worth more if they continue to trade and companies which ought to be allowed to fail, such that corporate bankruptcy law need no longer concern itself with steering creditor choice away from a sale of the business and assets and towards a restructuring. Moreover, it suggests that whilst the automatic stay remains a central tenet of corporate bankruptcy law where the market decides that the business and assets should be sold, in cases where the market sees more value if a company continues to trade, corporate bankruptcy law may operate very well without a stay as a resolution procedure for deadlocked negotiations. The article identifies that in many large restructuring cases the only liabilities which are implicated are financial liabilities, and queries the extent to which the distributional concerns of the progressive movement, and US federal bankruptcy law, apply where losses are shared amongst sophisticated financial institutions. It ends with an explanation of why the analysis is limited to large cases, an indication of areas for further research and a note of caution for the future.

Corporate Rescue : Key Concept dalam Kepailitan Korporasi

The problems discussed in this research are: first, how is the relationship between liquidation concept and the bankruptcy of solvable and viable (prospective) companies in Indonesia? Second, how is the attitude of the Supreme Court towards the bankruptcy of solvable companies in Indonesia? Third, how is the ideal concept of Indonesia’s corporate bankruptcy law in the future? This was a normative research. This research concludes, first, there is a relationship between the bankruptcy of solvable and viable (prospective) companies in the Commercial Court and liquidation concept implemented in Bankruptcy Law. Second, related to the bankruptcy of solvent companies in the Commercial Court, the Supreme Court calls off the adjudication of the Commercial Court according to several considerations, including the fact that the companies are still prospective and deserve an opportunity to continue their business and the bankruptcy proposal cannot be proven in a simple way. Third, the ideal concepts of Indonesia’s bankruptcy law in the future are (i) Separating the bankruptcy of corporate and individual. (ii) Insolvent becomes a standard of corporate bankruptcy. (iii) Implementing the principles of business continuity which becomes a concept of corporate rescue in the norm of Corporate Bankruptcy Law or Limited Liability Company Acts. (iv) There is a stricter regulation of revocation of bankruptcy of companies which no longer own their assets.

A Bad Man's Guide to Private Equity and Pensions

Modern corporate bankruptcy law has been shaped, and some of it written, by special interests. Even so, the law is rooted in American ideals of renewal, and of viewing failure in the marketplace as a sign of effort and gumption, not moral collapse. It’s a powerful idea - shedding the past to begin anew. But for decades, Chapter 11 of the U.S. Bankruptcy Code has also been used strategically - to destroy union contracts, edge out competitors, and limit product liability lawsuits.More recently, some private equity firms have honed Chapter 11 as an efficient financial engineering tool for insider sales - and for dumping pensions. Based on partial data from the Pension Benefit Guaranty Corp., at least 51 companies have abandoned pension plans in bankruptcy at the behest of private equity firms since 2001. They’ve dumped $1.592 billion in pension bills onto a government-backed agency that insures private defined benefit plans. Because pension insurance doesn’t cover all benefits, their actions have left some of the nearly 102,000 workers or retirees with lost benefits amounting to at least $128 million. And they've contributed to the chronic deficits at the Pension Benefit Guaranty Corporation.Other types of businesses, including publicly held companies, have also abandoned pension plans in bankruptcy. But the business model and practices of some private equity firms can make pension-dumping in bankruptcy especially attractive.The legal and regulatory environments in the U.S. combine with those practices to add up to a form of institutional corruption. In this working paper, I explain how Oliver Wendell Holmes’ hypothetical “bad man” can use bankruptcy as a strategy to profit. So, here is a bad man’s guide to ditching pensions in bankruptcy - legally.

Essential Corporate Bankruptcy Law

This article begins from a simple observation: Chapter 11 of the United States Bankruptcy Code is the global standard for corporate restructuring, but at the same time it is a far more complex procedure than most jurisdictions seem to require. This observation begs the question what parts of a bankruptcy system are ‘essential’. We argue that two elements are essential because they cannot be achieved by contracting alone: asset stabilisation and asset separation. Stabilisation ensures that the firm’s options are maintained. Asset separation ensures that the assets underlying these options can be separated from liabilities that are attached to them by law or contract. Both these elements drive much of the rules that are necessary to resolve distress but also show that parts of Chapter 11 are ‘unessential’ – for example, rules regarding reorganisation plans. Our goal is not to doubt the ‘richness and elasticity’ of corporate bankruptcy, particularly in the United States, but to find the essential elements. Beyond asset stabilisation and asset separation, features of the system are a matter of policy and politics. Understanding this helps in structuring insolvency systems and shows that Chapter 11 need not be the standard against which all other laws are measured.

Enterprise Law Conference of 2014: Edited Transcript

Two persistent questions of enterprise law are raised and addressed: First, how does law matter to business practice? Second, how can we make law that stimulates economic efficiency? These questions are difficult to answer because of two important complementarities: the complementarity between areas of law within a country’s legal regime and the complementarity between law and other social environments such as markets and social norms. Over the course of the two-day conference, academics and practitioners from the U.S. and Japan in the areas of corporate law, securities regulation, labor law (including both employment protection law and labor union law), bankruptcy law, and tax law investigate the ways that enterprise law affects practice complementarily with markets and social norms. A key analytical framework is introduced, in which the business enterprise is viewed as an incentive mechanism among the four indispensable capital providers of the firm: management, employees, shareholders, and creditors. Only through close attention to the incentive bargain between these four players can optimal legislative design and economic efficiency be achieved.

Proposals to Establish a Partnership Bankruptcy Regime in China: With Lessons from the UK and USA

AbstractFollowing in the steps of the USA and UK, China introduced partnerships with limited liability in 2006, the same year that a market‐oriented bankruptcy statute was enacted. Although the bankruptcy statute enshrines basic elements of modern bankruptcy law, it fails to stipulate specific rules for partnership bankruptcy. As partnership with limited liability acquires increasing importance, especially limited partnerships as a popular form of private equity firms, a partnership bankruptcy regime becomes indispensable. This article considers the experience of the UK and USA in order to make proposals to establish a partnership bankruptcy regime in China. Although partnership bankruptcy law can be formulated by analogy to corporate bankruptcy law, special considerations must be given to the characteristics of partnership such as unlimited liability and lack of separation of management from ownership. Further, as partnership bankruptcy may lead to partner bankruptcy and vice versa, conflicts between partnership creditors and partners' personal creditors must also be considered. Copyright © 2014 INSOL International and John Wiley & Sons, Ltd

The Virtue in Bankruptcy

In response to a gap in the corporate bankruptcy literature, this Article offers a new positive theory of corporate bankruptcy law based on virtue ethics. The dominant theory of corporate bankruptcy law — the creditors’ bargain model — is necessarily incomplete because it does not account for bankruptcy courts’ equitable and discretionary powers, or for bankruptcy courts’ need to consider decision-making criteria other than economic efficiency. By contrast, virtue ethics offers insights about these features of corporate bankruptcy law for at least three reasons. First, bankruptcy courts appear to give content to bankruptcy laws by using virtue ethical principles. Second, virtue ethics’ decision-making process — practical wisdom — provides insights into how bankruptcy judges balance concerns about efficiency, justice, and fairness when reaching decisions. This is particularly true when the bankruptcy court’s equitable jurisdiction or discretionary powers are implicated. Third, virtue ethics’ symbiotic consideration of means and ends parallels the process bankruptcy judges are called on to use when exercising their discretionary or equitable powers under numerous provisions of the Bankruptcy Code.

Essential Corporate Bankruptcy Law

In this paper our goal is to identify the core of corporate bankruptcy law that parties cannot achieve on their own, no matter how robust their contract law. Our approach takes organizational law as starting point and we posit that bankruptcy law is a necessary addition to organizational law. Necessary in that two essential elements of corporate bankruptcy law cannot be achieved by contract: asset stabilization and asset separation. Asset stabilization refers to the ability to temporarily protect assets as a coherent whole. It includes obvious things like the stay on individual creditor collection, but also other features like the ability to provide post-bankruptcy liquidity to the debtor and delays on termination of contracts with the debtor.Asset separation captures the ability to separate assets from their concomitant liabilities. This might take the form of a discharge, but strictly speaking a discharge is not necessary to achieve asset separation.From both these elements a number of rules follow that are essential for any bankruptcy system, i.e. an encompassing collective process, a stay of creditors, a liquidity enhancing system of rules, a monitor and asset detachment rules. Other rules are non-essential, i.e. absolute priority rule, reorganization plan rules, debtor-in-possession rules, creditor committees, statutory priorities.Beyond the core of corporate bankruptcy law, features of the system are a matter of policy, and politics. Understanding where the core is, however, helps to focus policy makers’ attention on the choices involved in structuring an insolvency system. And it moves away from the notion that chapter 11 must be the standard against which all other laws are measured.

Measuring the Effect of Bankruptcy Laws on Entrepreneurship Across Countries

Two recent papers examine the impact of corporate bankruptcy laws on new business start-ups in 29 countries over 1990 - 2008 (Peng et al., 2010; Lee et al., 2010). In this commentary, I briefly point out two significant issues which future researchers might want to consider. First, several countries in the data examined had changed their personal and corporate bankruptcy laws over the years studied. It is statistically inappropriate and inaccurate to treat bankruptcy laws as time invariant, as in Peng et al. (2010) and Lee et al. (2010), particularly in view of the dramatic changes in bankruptcy laws over time in so many countries. Second, Peng et al. (2010) and Lee et al. (2010) have a misplaced focus on corporate bankruptcy law while ignoring personal bankruptcy law. This focus is at odds with theory and prior work on topic which relates entrepreneurship to personal bankruptcy law.

Forgiving Features for Failed Entrepreneurs vs. Cost of Financing inBankruptcies

Anentrepreneur-friendly bankruptcy law lowers exit barriers by exposing failed entrepreneurs to comparatively less painful exit procedures. This in turn lowers the entry barriers and risks for entrepreneurs to launch new businesses. However, this reduced entry barrier may not come for free. From the standpoint of financial institutions a more lenient bankruptcy law means a higher risk of insolvency for their loans to entrepreneurs. In this study we examine the relationship between two forgiving features of a bankruptcy law (i.e., fresh start in personal bankruptcy law and automatic stay of assets in corporate bankruptcy law) and the rate of new firm entry, as well as the mediating effect of the cost of financing. We use a cross-country database of 28 countries spanning 15 years. While these two features share the same forgiving nature, we find that providing failed entrepreneurs with a “fresh start” encourages new firm entry but providing entrepreneurs an opportunity to recover from troubling situations with an “automatic stay of assets” does not. Most importantly, both “fresh start” and “automatic stay of assets” give financial institutions incentives to charge higher interest rate (i.e., lending rate) to entrepreneurs; this in turn lowers the rate of new firm entry.

Building Legal Indexes to Explain Recovery Rates: An Analysis of the French and English Bankruptcy Codes

The main aim of this paper is to find the legal characteristics that impact on the recovery rates. Previous studies (LLSV, Doing Business Report, World Bank) have usefully used a set of legal indexes to rank the bankruptcy law prevalent within the country. But they fail to identify the characteristics of bankruptcy procedures that create more recoveries. We give here elements of answer by taking into consideration two countries that are good representatives of the two main legal systems prevailing in Europe: France (Civil Law) and United Kingdom (Common Law). To enable this, we built original legal indexes comprising of 158 binary questions that highlight ten major dimensions of corporate bankruptcy procedures: (1) accessibility, (2) exclusivity, (3) bankruptcy costs, (4) production of information, (5) protection of the debtor’s assets, (6) protection of claims, (7) coordination of creditors, (8) decision power, (9) sanction of faulty management, and (10) inclination towards liquidation / reorganization. We then propose a mapping of procedures that shows a clear specialization between them. The French procedures (“redressement judiciaire” and “liquidation judiciaire”) are more protective of the debtor’s assets and favor more the coordination of secured claims, public claims, and unsecured claims. In UK, we find strong opposition between the procedures oriented to liquidation and the other procedures. We then use an original database of 833 French and UK bankruptcy files to measure the recovery rates that are generated by each procedure. We find strong differences be tween them. We then turn to OLS regressions and use our legal indexes to isolate the characteristics of bankruptcy law that significantly impact on the total recovery rate. By controlling for the value of assets, the structure of claims, the origins of default, and the firm characteristics, we test for several hypotheses. We first isolate the legal features of bankruptcy procedures that are associated to higher total recovery rates: namely, accessibility of the procedure, protection of the debtor’s assets, protection and coordination of claims, orientation towards reorganization, and bankruptcy costs. From that perspective, these costs are not sunk cost only, but can be viewed as the counterpart of a service provided by the practitioners that eventually serve the creditors’ recoveries. On the contrary, we find that the production of information under bankruptcy has a negative impact on total recoveries, probably due to the breach in confidentiality. Last, some dimensions of corporate bankruptcy law are not significantly related to total recovery rates (inclination towards liquidation, severity towards faulty management).

The Economic Perspective of Bank Bankruptcy Law

This paper argues that a special bank bankruptcy regime is desirable for the efficient restructuring and/or liquidation of distressed banks. We first explore the principal features of corporate bankruptcy law. Next, we examine the specific characteristics that distinguish banks from other corporations, and argue that these features are largely neglected in corporate bankruptcy law. Finally, we make recommendations for optimal closure and reorganization policies, which should allow regulators to better mitigate disruptions in the financial system and minimize the social costs of bank distress. We compare the U.S., UK, and German bank bankruptcy frameworks and describe the EU framework for cross-border bank bankruptcy. We support our recommendations with a discussion of the Lehman Brothers and Fortis bank failures.

Preliminary Report to the UK Insolvency Service into Outcomes in Company Voluntary Arrangements

Corporate bankruptcy law in the UK offers distressed companies a range of formal rescue and restructuring procedures which seek to facilitate the continuation of the company and/or its business. One such procedure is the company voluntary arrangement (or for short). A is essentially a voting mechanism which allows a restructuring proposal to be brokered by the company with the assistance of a licensed insolvency practitioner and implemented if it is approved by the requisite majority of creditors. CVAs take two forms. The first is a stand-alone which does not provide for a (stay) on creditors' claims in the period before the creditor vote. The second is a CVA with moratorium which provides for a pre-vote of up to 28 days. However, the with is only available to small companies which satisfy defined eligibility criteria. Proposals to introduce a CVA with moratorium model accessible by all companies were consulted on by government during 2009 and 2010. UK bankruptcy policy is therefore drifting towards the idea that a may be needed, more often than not, to facilitate the approval and implementation of otherwise viable restructuring proposals. Yet there is very little empirical evidence as to how the existing procedures are working and whether they generate successful outcomes. This paper (which takes the form of a report commissioned by government) contains the results of a preliminary investigation of outcomes under the existing law. It seeks to provide a basic foundation for further hypothesis formation, research and policy evaluation. Our dataset consists of all 547 CVAs recorded as commencing in 2006 in England and Wales the raw data deriving from mandatory filings at Companies House, the UK companies registry. Having identified thirteen different outcomes in the entire population, we analyse a sample of 177 CVAs (32.4%) stratified according to the outcomes observed in the population to produce a range of descriptive statistics. With some notable exceptions - such as the restructuring of the English Federal Mogul/T&N group companies - usage is dominated by small companies. This of itself is not surprising bearing in mind that the vast majority of live company registrations in the UK consists of small companies. However, despite high levels of eligibility, we find that barely any of these companies use the small company CVA with moratiorium procedure. Chief among our other findings is that the stand-alone appears to be used relatively successfully in some cases as a substitute for a winding-up procedure rather than as a restructuring mechanism. We also detect some possible abuse at the margins in that companies which have failed to comply with the terms of the restructuring are able to exit from the straight to a dissolution, thus enabling their directors to escape scrutiny under our wrongful trading and director disqualification legislation.