Vol 12 (2015) - Issue 4

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Is It Time to Reform Chapter 11 of the US Bankruptcy Code?

On 8 December 2014, the Commission to Study the Reform of Chapter 11 of the American Bankruptcy Institute (the 'Commission') issued its much-anticipated 400-page Final Report and Recommendations, which sets forth the Commission’s recommendations for the reform of chapter 11 of the Bankruptcy Code. While the United States Congress has not begun any formal process to reform the Bankruptcy Code, the Report will undoubtedly influence any upcoming chapter 11 amendment.

I. Background
Since the 19th century, US corporate reorganization laws have been amended approximately every 40 years. The current Bankruptcy Code was enacted in 1978. As it nears its 40th birthday, the Commission found that an evaluation and review of the Bankruptcy Code was appropriate in light of 'the expansion of the use of secured credit, the growth of distresseddebt markets and other externalities that have affected the effectiveness of the current Bankruptcy Code'. Indeed, today’s financial markets, credit and derivative products, and corporate structures are far different and more complex from those that existed when the Bankruptcy Code was enacted. In addition, it is believed by some that chapter 11 has become too expensive, especially for small and medium-sized companies, which hindered its ability to help rehabilitate certain viable companies.
When the Commission started meeting in January 2012, it embarked on a mission to study chapter 11 and propose reforms that 'will better balance the goals of effectuating the effective reorganization of business debtors – with the attendant preservation and expansion of jobs – and the maximization and realization of asset values for all creditors and stakeholders.' The comprehensive three-year study of chapter 11 involved more than 250 esteemed reorganisation professionals.
The Commission’s recommended principles seek to, among other things:
– Reduce barriers to entry by providing debtors more flexibility in arranging debtor in possession financing, clarifying lenders’ rights, 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 restructuring alternatives;
– Facilitate more timely and efficient diligence, investigation, and resolution of disputed matters through a neutral party – in a role that would replace the role of an examiner, an individual could be appointed depending on the particular needs of the debtor or its stakeholders to assist with certain aspects of the chapter 11 case;
– Enhance the debtor’s restructuring options by simplifying the process of cram down of a chapter 11 plan and by formalizing an express mechanism 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; and
– Incorporate checks and balances on the rights and remedies of the debtor and creditors, including through valuation concepts that may enhance a debtor’s liquidity during the case, permit secured creditors to realise the reorganisation value of their collateral at the end of the case, and provide value allocation to junior creditors when supported by the reorganisation value.