Essential Corporate Bankruptcy Law

Authors:  Oscar Couwenberg & Stephen J. Lubben

In every economy, the question of what to do with financially distressed businesses is a matter of concern.   The United States has a long history of corporate restructuring law, starting with the reorganization of railroads in the nineteenth century and continuing through chapter 11 in its current form.   This naturally leads to a tendency to adopt chapter 11, or something like it.

But why?  In particular, chapter 11 is a rather ornate system of corporate reorganization, and it has been adorned with elements that reflect little more than particular creditors’ ability to lobby Congress.

We reexamine chapter 11 to understand its core.  In short, what, if any, are the essential elements of corporate bankruptcy law?

We point to two facets of chapter 11:  asset stabilization and asset separation.  These two aspects of chapter 11 could not be established other than by statute, and jurisdictions looking to reform their corporate bankruptcy processes should focus there.

Asset stabilization is the ability to temporarily protect assets as a coherent whole.  It includes obvious things like the stay on individual creditor collection, provision of post-bankruptcy liquidity 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 is not necessary.  Essential is that the system provides clean title to a new owner of the assets, which may or may not be the post-bankruptcy firm.

As this is the core of any sensible corporate insolvency system, features beyond that are a matter of policy, and politics.

The full article can be found here.