United States Bankruptcy Code Research Articles

Ratio Legis of Bankruptcy and Suspension of Debt Payment Obligations to Fulfil Creditors' Rights

Law No. 37 of 2004 concerning Bankruptcy and PKPU was established to address the debtor's obligations amidst financial incapacity. However, Law No. 37 of 2004 is invoked as the underlying basis by corporations seeking to absolve themselves from debt obligations. The objective is to understand corporate rescue, the principles of commercial exit from financial distress, and their connection to the fulfilment of creditor rights in the PKPU or Bankruptcy processes under Law No. 37 of 2004. The research methodology is empirical juridical, with the primary data as the main source, supplemented by secondary data through observations and interviews, with qualitative analysis and inductive conclusions. The research findings indicate that the simplified evidentiary outlined in Law No. 37 of 2004 is inappropriately invoked as the legal basis for Debtors is financially solvable and viable. Consequently, this leads to creditors losing. Moreover, Law No. 37 of 2004 is considered irrelevant; the emphasis should shift towards the concept of corporate rescue as a principle for business continuity. This approach aligns with practices in developed countries within the EU, as outlined in Chapter 11 of the United States Bankruptcy Code, to be used as a parameter to revise Law No. 37 of 2004.

Cryptocurrency’s Clash with Bankruptcy: Insolvent Crypto Exchange Companies Create Difficulties for Courts & Customers

This comment explores the novelty of cryptocurrency, its legal ambiguity in the realms of securities, property, and tax law, and the difficulties arising from insolvent crypto-exchange company’s estates within the context of the United States Bankruptcy Code. For the purposes of this comment, individuals who invested in crypto-exchange platforms will be referred to as “customers” rather than “investors” to avoid potential confusion in the context of 11 U.S.C. § 507 of the Bankruptcy Code. Customers who invested with insolvent crypto-exchange companies are concerned about being last in line for repayment of their investments based on traditional bankruptcy creditor priority. These concerns, combined with the alleged mismanagement and undercapitalization of many insolvent crypto-exchange companies, have introduced new issues of legal interpretation and the weighing of various policy concerns both within and outside of the bankruptcy process. By examining the bankruptcy process, the history of cryptocurrency, and analyzing several current cases of insolvent crypto-exchange companies, this comment explores the multi-faceted issues surrounding cryptocurrency as well as the need for guidance and clarity of cryptocurrency’s classification for the purposes of bankruptcy law.

CEO turnover and bankrupt firms’ emergence

AbstractThis paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor‐in‐possession financing. Additionally, there is a significant increase in managerial quality post‐turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free‐fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.

CEO Turnover and Bankrupt Firms’ Emergence

This paper examines whether CEO turnover within a bankrupt firm predicts the firm’s likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm’s chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor-in-possession financing. Additionally, there is a significant increase in managerial quality post-turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free-fall bankruptcies, where there is less pre-existing agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.

The U.S. small business bankruptcy amendments: A global model for reform?

AbstractOn February 19, 2020, the Small Business Reorganization Act of 2019 went into effect in the United States. This statute was intended to make the rescue regime of Chapter 11 of the United States Bankruptcy Code more effective for smaller businesses that would not otherwise have the financial wherewithal to complete a traditional Chapter 11 reorganization. This article describes the central innovations of the new statute, and considers whether they might be adaptable by other countries.

Restructuring Venezuela’s Debt: An Update

Lee Buchheit and Mitu Gulati have proposed an innovative and aggressive strategy to facilitate the restructuring of Venezuela’s external debt based on consensual agreement between Venezuela and a supermajority of its broad creditor universe. Borrowing from the United Nations Security Council’s decision (supported by action of the United States) to shield Iraq’s assets from seizure by its creditors in order to promote a restructuring of Iraq’s debts, they propose that the Security Council or (more likely) the President of the United States by Executive Order shield Venezuela’s assets (particularly revenues from the sale of oil into the United States from) legal process. The rationale for their proposal rests on the premises that (1) virtually all of Venezuela’s foreign exchange is generated by sales of oil into the United States, (2) the revenues from exports of oil to the United States are vulnerable to attachment by creditors and therefore a small group of aggressive creditors could strangle the entire economy of the country, (3) existing restructuring techniques are inadequate to the task and (4) the policy of the United States is to promote the restructuring of sovereign debt based on an agreement between the debtor state and a supermajority of its creditors in the context of a process in which all creditors are bound by the vote of a supermajority. This article argues that (1) a new Venezuelan government (which all agree is a prerequisite to a restructuring) will have substantial means to shield the country’s oil revenues from seizure by creditors, (2) a new government will also be able to expand its foreign exchange earnings to include sale of oil outside the United States, (3) the proposals do not create a mechanism to allow all of Venezuela’s creditors to have a voice in the terms of a restructuring — by supermajority or otherwise — and would treat U.S. and non U.S. creditors differently and (4) the unintended consequences of the proposals advanced by Buchheit and Gulati would negatively affect the ability of emerging market sovereigns, and Venezuela in particular, to fund themselves in the debt markets and would be disruptive of the sovereign debt market generally. Referring to the paper that the author and Richard Cooper wrote one year ago, the author argues that there are tested, market-based mechanisms to achieve the goal of a consensual restructuring arrived at by a supermajority vote of creditors, in particular a restructuring of PDVSA’s debts under a newly enacted Venezuela law that is implemented with the support of a Chapter 15 proceeding under the United States Bankruptcy Code. To the extent that the application of Chapter 15 proves problematic, action by Executive Order of the President of the United States would ensure that the process and benefits envisaged by Chapter 15 are available.

El proceso concursal extrajudicial previo en el Código de Quiebras de Estados Unidos (el 'Prepackaged Chapter Eleven' del U.S. Code)

El presente trabajo estudia el Prepackaged Chapter Eleven (en adelante denominado PCE), proceso extrajudicial previo o alternativo al proceso del Chapter Eleven, el cual constituye una parte del sistema concursal de los Estados Unidos que abarca las soluciones preventivas de la quiebra en ese país, cuya finalidad es preservar y, virtualmente, salvar a la empresa de su desaparición económica y jurídica; este es conocido por el nombre de su respectivo capítulo, el Capítulo Once del Title Eleven del United States Bankruptcy Code, norma concursal federal que engloba numerosas materias en sus distintos capítulos. Los tópicos abordados en el trabajo son: el PCE en el contexto del derecho concursal estadounidense; las variables que justifican la elección entre el PCE y el tradicional proceso concursal del Chapter Eleven; las restantes vías extrajudiciales de reorganización empresarial; una descripción del PCE y su ámbito de aplicación; sus antecedentes históricos; la política legislativa de la reforma concursal de 1978; las posibilidades y ventajas de los procedimientos previos al Chapter Eleven; una comparación entre el proceso extrajudicial del PCE y el proceso judicial del Chapter Eleven; los casos en los que no es conveniente o pertinente el PCE; los tipos o variantes del PCE; técnicas para un PCE exitoso; los requisitos procesales para una solicitación de votos preconcursal; los riesgos que se corren en un PCE; algunos desarrollos recientes; los efectos de la reforma concursal de 2005, y la eficacia del PCE. En la parte conclusiva se realiza una valoración crítica de estas instituciones.

Bankruptcy in Turkey: A Comparative Study of Turkey’s Adjournment of Bankruptcy and the United States’ Chapter 11 Reorganization

To build and maintain economic fortitude, the paradigm of fiscal success remains steadfast for both developed and developing nations in one specific area: bankruptcy law. History shows that robust economies incorporate reliable bankruptcy codes into their legal schemes so that small and large businesses thrive. However, because of the influences of varied stimuli including worldviews, cultural values, and politics, not all bankruptcy laws are created equal in their respective effectiveness, fairness, and influence. For example, the current United States Bankruptcy Code, ratified after nearly one hundred years of Congressional repeals and re-enactments is today a comprehensive, well-established legal scheme that efficiently permits debtors of varied status to file under its assorted Chapters. The United States’ Code seeks to successfully balance the rights of all parties involved in a bankruptcy, while further reassuring that the honest debtor receives a ‘fresh start.’ To compare, the Turkish Execution and Bankruptcy Code is still evolving in its structure to better equalize the treatment of debtors and creditors. This comparative paper first looks to the Turkish Bankruptcy Code and how it evolved, specifically in the area of adjournment of bankruptcy. To compare and contrast these two diverse legal structures, the study first analyzes the impacts of the 2003 and 2016 amendments of Article 179 in the area of adjournment, then proceeds to assess the requirements an entity must adhere to when seeking adjournment, and finally concludes with an in-depth analysis and comparison of United States’ Chapter 11 with the Turkish adjournment of bankruptcy. Following the analysis of the two Codes, the study closes with the authors’ recommendations of how to improve Turkey’s adjournment of bankruptcy.

The Suitability of South Africa's Business Rescue Procedure in the Reorganization of Small-to-Medium-Sized Enterprises: Lessons from Chapter 11 of the United States Bankruptcy Code.

South African small- to medium-sized enterprises (“SMEs”) are the bread and butter of our economy. Providing much-needed employment and developing the skills of historically disadvantaged persons formally and informally are some of the most significant benefits of SMEs in a developing country such as South Africa. However, despite these significant contributions to the socioeconomic development of the country, SMEs generally have the lowest survival rates in the world as compared to large enterprises globally, resulting in high rates of business failure and the loss of jobs which these entities create. The Companies Act of 2008 replaces the previous judicial management corporate reorganization procedure for companies in South Africa with the new business rescue model and a compromise between a company and its creditors. Business rescue provides companies in financial distress with the opportunity to reorganize, strategize, and devise reorganization measures that are useful, efficient, and capable of yielding a better return for creditors than liquidation. This Comment comparatively analyzes whether the South African corporate rescue systems, past and present, have developed in line with the needs and interests of South African SMEs in a manner that is efficient and sensitive to the inherent weakness of our economy and the distinctive needs of SMEs in a developing country such as South Africa.

Some Aspects of South African Cross-Border Insolvency Relief: The Lehane Matter

The Lehane matter wound its way through the Cape Provincial Division of the High Court and reached the Supreme Court of Appeal. Mr Dunne, the debtor, lived in the United States of America and ran an international web of companies. One of these companies, Lagoon Beach Hotel, operated a Cape Town hotel. Mr Dunne later filed for chapter 7 bankruptcy in the United States and soon was also bankrupted by the Irish High Court. The Irish official trustee, Lehane, applied to the Cape court for the recognition of his status as a foreign trustee and for an anti-dissipation order preventing the disposal of South African property to which Mr Dunne was connected. Lehane succeeded at every stage of the South African proceedings.
 Initially, Steyn J recognised Lehane as the trustee as though a sequestration order had been granted against Mr Dunne in terms of the Insolvency Act 1936, thus diverging from the approach taken by the Judicial Committee of the Privy Council in Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda). Subsequently, Yekiso J's approach to applying the Insolvency Act without derogating from its generality opens up the possibility of applying section 21 of the Insolvency Act to significant effect against Mrs Dunne's South African property. Yet the territorialist restriction in Yekiso J's order that only creditors with causes of action which arose in South Africa were entitled to claim against the insolvent estate excluded many foreign creditors, even those from Ireland.
 Of the many issues raised by the Lagoon Beach Hotel company, two that are chosen for discussion in this case note are the possible application of the automatic stay under section 362 of the United States Bankruptcy Code 1978 to the South African proceedings, and the standing of Lehane because of the litigants' dispute whether Mr Dunne was domiciled in the United States or Ireland.
 Yekiso J and subsequently Leach JA held that the American automatic stay did not govern the South African proceedings. Significantly, the American and the Irish trustees were co-operating with respect to proceedings in Ireland and South Africa that involved Mr Dunne. And Leach JA deftly deferred to the Irish court the decision regarding the application of the American automatic stay and its relevance to the Irish proceedings.
 As for the disputed domicile of Mr Dunne, Yekiso J and Leach JA both considered that Mr Dunne had retained his Irish domicile. The established principles of recognising a foreign domiciliary trustee before he might deal with South African property, whether movable or immovable, were confirmed. Leach JA, however, went on to discuss the assistance that might cautiously be accorded to Lehane if Mr Dunne were domiciled elsewhere than in Ireland. Even then, the relevance of domicile could not be gainsaid.
 In the comments, it is pointed out that trustees appointed in countries other than the insolvent's domicile may still be recognised by South African courts. The insolvent's submitting to the jurisdiction of a court that is not the court of his domicile is discussed; on its facts, the cited authority does not bear out the relevant principle. And the possibility of recognising non-domiciliary trustees in exceptional circumstances and for exceptional convenience is explored. The cases cited in support of this principle are shown to yield differing results.

Up the Chute, Down the Ladder: Shifting Priorities Through Structured Dismissals in Bankruptcy

In a “structured dismissal” of a chapter 11 bankruptcy case, a bankruptcy court approves case dismissal alongside a stakeholder agreement as to the manner in which the estate is to be dealt with once the case has been dismissed. Such orders are controversial in that they are not explicitly authorized through the United States Bankruptcy Code, but are especially controversial where the accompanying agreement seeks to distribute estate property in contravention of the priority scheme laid out in Section 507 of the Code. Where the agreement violates this “waterfall” payment method, bankruptcy courts are faced with difficult questions: should structured dismissals be strictly governed by the Code’s priority regime? Should they ever be approved where they deviate from priorities? If so, what standard should a bankruptcy court apply in deciding whether deviation is proper? This Note explores a recent decision by the Third Circuit, In re Jevic Holding Corp., in which the Court affirmed a bankruptcy court’s approval of a structured dismissal that cut against priorities, relying heavily on the importance of economic efficiency and stakeholder compromise in reaching its holding. This Note argues that while priority deviation is sometimes proper, the standard applied by the Third Circuit for approval of priority-noncompliant structured dismissals does not go far enough to ensure that the procedural safeguards of chapter 11 are upheld. This Note therefore proposes a multifactor analysis that would provide a more transparent system for approval of structured dismissals that do not comply with priorities.

The City of Freetown Financial Crisis: Legislating for Municipal Insolvency in Sierra Leone through the Lens of Chapter 9 of the United States Bankruptcy Code

Modern day cities tend to operate much like companies (corporations) rather than merely as another strata of the executive arm of government, clothed with full sovereign powers and privileges, including state immunity. Cities engagement in commercial activities in the discharge of their obligations under the social contract have made them susceptible to the usual problems faced by corporate bodies, including debt default and insolvency. When cities go broke, the law should provide mechanisms for dealing with such a phenomenon in the least problematic or hazardous way possible. There are two main recognized systems of dealing with debt problems of cities, and that is either the bargain based debt adjustment through insolvency law; or through bailout by the central or federal governments via constitutional or administrative law. Sierra Leone has no municipal insolvency law and has relied on bailout overtime made possible by administrative law. To all intent and purposes, Freetown, the capital city of Sierra Leone, went broke in 2011. In the wake of this occurrence, this thesis examines the principles and elements of municipal insolvency through the lens of Chapter 9 of the United States Bankruptcy Code, and equally assesses the needs and benefits of adopting such a system in Sierra Leone. In doing so, this thesis employs both doctrinal and comparative law methods in addressing the effectiveness of the present fiscal arrangement of the City of Freetown. It finds that the present system creates an imbalance between the interest of municipalities and that of their creditors, and concludes that the use of municipal insolvency reduces the political and moral hazard associated with central government bailout and incentivizes creditors for more lending at an economic rate.

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.

Corporate Bankruptcy Tourists

Foreign corporations facing financial distress have a choice: resructure in their home jurisdiction or file for bankruptcy in the United States. And some number of foreign corporations do file bankruptcy petitions in the United States. But besides the occasional anecdotal account, how frequently this actually happens or what types of foreign firms are apt to file in the United States is almost completely unstudied. American firms that file under chapter 11 and foreign firms that file under chapter 15 are the frequent objects of study, but what of the foreign firms that file under chapters 7 or 11? We address this obvious gap in the literature by constructing a database of foreign corporate debtors. By analyzing this new dataset, we conclude that the United States Bankruptcy Code is used by foreign debtors in a way that is diametrically opposed to most of the extant thinking on transnational insolvency. In particular, foreign debtors use the American bankruptcy system to impose a global discharge on assets, without the cooperation of any jurisdiction beyond the United States, where the case is pending. This is in complete contrast with the efforts of UNCITRAL to facilitate cross-border cooperation among jurisdictions.

Priority and rescue financing in the Commonwealth Caribbean: lessons from the United States of America, United Kingdom and European Union

In investigating the operation of the rescue culture in the Commonwealth Caribbean as compared to the United Kingdom administration regime and Chapter 11 of the United States Bankruptcy Code, this paper laments that the Commonwealth Caribbean and the USA fail to consider key issues of post-petition priority for finance. It also delves into a critical, but overlooked, pillar of strong rescue frameworks: access to finance. Taking guidance from the European Union framework on state aid and the UK Funding for Lending and National Loan Guarantee, the author proposes a fair, transparent and efficient framework encompassing state involvement and state-driven private sector engagement.

Financial Distress and Corporate Governance: The Impact of Board Configuration

The number of filings for bankruptcy procedures has exploded since 2007 and governance has been pointed out as one of the causes. We took a dataset of 312 US firms and asked the following research question: does the board of directors configuration have an impact on financial distress? We used a matched-pair sample of US quoted firms with half of the sample filing for Chapter 7 (liquidation) or 11 (reorganization) of the United States Bankruptcy Code and conducted logit regression analysis. We found that some board size was significantly different for firms that opted for legal protection from those that did not. This study uses corporate governance perspective to analyse the configuration of the board and its impact on a the decision of a company to resort to a bankruptcy protection law. By demonstrating that corporate governance matters in terms of financial distress, this study offers guidance to shareholders and financial institutions.

Statutory Research Conundrum: 11 U.S.C. § 507(a)(7) in the United States Bankruptcy Code

This article will review early Bankruptcy Laws, examine technical amendments for 11 U.S.C. § 507(a)(7) and analyze the findings.

Financial distress and corporate governance: the impact of the CEO

The number of filings for liquidation and reorganisation procedures has exploded since 2007 and governance has been pointed out as one of the causes. We took a unique dataset of 312 US firms and asked the following research question: does chief executive officer (CEO) entrenchment have an impact on financial distress? We used a matched–pair sample of US quoted firms with half of the sample filing for Chapter 7 (liquidation) or 11 (reorganisation) of the United States Bankruptcy Code and conducted logit regression analysis. We found that some CEO characteristics linked to entrenchment were significantly different for firms that opted for legal protection from those that did not. Specially, defaulted firms had CEOs that had more tenure and less ownership. This study uses entrenchment perspective to examine CEO configuration and its influence on a company's decision to resort to a bankruptcy protection law. Findings show that CEO entrenchment influences the filing for a liquidation or reorganisation procedure. By demonstrating that corporate governance matters in terms of financial distress, this study offers guidance to shareholders and financial institutions.

The Supply Chain Effects of Bankruptcy

This paper examines how a firm’s financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier–buyer relationships. We identify three effects—predation, bail-out, and abetment—that can change firms’ behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the nondistressed competitor behaves as if it has some first-mover advantage that could benefit a supplier with price control. The bail-out effect reflects the supplier’s incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor’s predation, leading to increased operational disadvantages for the distressed firm before bankruptcy. Together these effects stress that a firm’s bankruptcy potential can hurt its competitors and benefit its suppliers/customers. They also provide guidelines for firms’ operational decisions in such situations, a rationale for observed firm actions surrounding bankruptcies, and motivation for policies supporting reorganization and relaxing broad enforcement of nondiscriminatory pricing regulations. This paper was accepted by Serguei Netessine, operations management.

Goodbye to Chapter 11: The end of business bankruptcy as we know it

Paper considering the business reorganisation introduced under Chapter 11 of the United States Bankruptcy Code. The author examines the intended purpose of Chapter 11 and asserts that this chapter was once used to preserve the interests of equity owners, while now it is used to preserve the value of assets. Article by John D. Ayer (Professor of Law, University of California at Davis; Fellow, American College of Bankruptcy). Published in Amicus Curiae - Journal of the Institute of Advanced Legal Studies and its Society for Advanced Legal Studies. The Journal is produced by the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies, University of London.