Leiden Law Blog

American Bankruptcy Institute Report Recommends Structural Reform of Chapter 11 U.S. Bankruptcy Code

Posted on by Bob Wessels in Private Law
American Bankruptcy Institute Report Recommends Structural Reform of Chapter 11 U.S. Bankruptcy Code

After a period of 3 years’ work, the American Bankruptcy Commission (ABI) Commission to Study the Reform of Chapter 11 released its long-awaited final report on Monday 8 December. The report, over 400 pages long, contains over 241 recommendations for modernizing the U.S. Bankruptcy Code for chapter 11 business reorganizations: ‘Chapter 11 works to rehabilitate companies, preserve jobs, and provide value to creditors only if distressed companies and their stakeholders actually use the chapter 11 process to facilitate an in-court or out-of-court resolution of the company’s financial distress.’ The ABI Commission was established in recognition of the general consensus among restructuring professionals that the time has come to evaluate U.S. business reorganization laws as a result of numerous changes that have occurred since the Bankruptcy Code which was enacted in 1978. In light of the expansion of the use of secured credit, the growth of distressed-debt markets in the US and other externalities that have affected the effectiveness of the current Bankruptcy Code, the Commission will study and propose reforms to chapter 11, with the goal of effectuating the effective reorganization of business debtors (combined with preservation and expansion of jobs) and the maximization and realization of asset values for all creditors and stakeholders.
See my 4 February 2013 blog.
Chapter 11 therefore, so the ABI Commission concludes, needs to offer tools to resolve a debtor’s financial distress in a cost-effective and efficient manner. Funded by ABI and the Anthony H.N. Schnelling Endowment Fund, the Commission’s final report incorporates the recommendations of more than 130 leading experts, providing (with over 1200 footnotes) one of the most comprehensive studies of its kind in more than a decade, giving struggling companies a better shot at survival. In the report it is recommended to, among other things (I am following the Introduction, at 6):

  1. Reduce barriers to entry to a chapter 11 case by providing debtors more flexibility in arranging debtor in possession financing, clarifying lenders’ rights in the chapter 11 case, disclosing additional information about the debtor to stakeholders, and providing a true breathing spell at the beginning of the case during which the debtor and its stakeholders can assess the situation and the restructuring alternatives;
  2. Facilitate more timely and efficient diligence, investigation, and resolution of disputed matters through an ‘estate neutral’; this is an individual that may be appointed depending on the particular needs of the close to insolvent debtor or its stakeholders to assist with certain aspects of the chapter 11 case, as specified in the appointment order;
  3. Enhance the debtor’s restructuring options by eliminating the need for an accepting impaired class of claims to cram down a chapter 11 plan and by formalizing a process to permit the sale of all or substantially all of the debtor’s assets outside the plan process, while strengthening the protection of creditors’ rights in such situations;
  4. Incorporate checks and balances on the rights and remedies of the debtor and of creditors, including through valuation concepts that potentially enhance a debtor’s liquidity during the case, permit secured creditors to realize the reorganization value of their collateral at the end of the case, and provide value allocation to junior creditors when supported by the reorganization value; and
  5. Create an alternative restructuring scheme for small and medium-sized enterprises that would enable such enterprises to utilize chapter 11 and would enable the court to more efficiently oversee the enterprise through a bankruptcy process that incentivizes all parties, including enterprise founders and other equity security holders, to work collectively toward a successful restructuring. For this reason the Report proposes a set of principles for small and sedium-sized enterprises.

Generally, the ABI’s Commission to Study the Reform of Chapter 11 describes how federal lawmakers could restore protections that have eroded since the last major overhaul of corporate reorganization law in 1978. The proposed changes should make chapter 11 more efficient, cost effective and provide more predictability. It will be cheaper and simpler for small businesses, which would have access to a new restructuring advisor. In addition they would no longer have to pay for an expensive committee of creditors in most cases. The Report will most probably be the start of a legislative process which will last several years. However, any long walk starts with a first step.

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