Download This PaperAbuse of Vote by Prevalent Creditors in Reorganizing Bankruptcies: The Unintended Consequences of Judicial Activism
28 Pages Posted: 6 May 2020
Date Written: January 27, 2020
Abstract
Some bankruptcy judges in Brazil have been ignoring statutory provisions commanding forced liquidation in the event a debtor fails to obtain confirmation of its reorganization plan. They do it because they believe preserving the firm maximizes value to those involved and that creditors’ voting for rejection act egotistically. I argue that these judges are mistaken and that their decisions have had unintended but foreseeable negative consequences, resulting in relevant social losses. Due to current incentives structure, bad plans will be approved, and only those that are unacceptable will be rejected. If a plan is so bad that does not get approval by creditors, debtor should not be allowed an opportunity to attempt to reorganize. To confirm my argument, I analyze the results of reorganizations where a rejected plan was forcefully imposed by courts, and in most of the cases I find that the consequences of court’s decisions were contrary to the intended objectives. The results of this paper are relevant because court decisions that ignore statutory commands are justified by a belief that reorganizations will result in value maximization for stakeholders, a belief I show to be wrong.
Keywords: bankruptcy, reorganization, abuse of voting rights, consequences
JEL Classification: K22, K35
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