Essential Corporate Bankruptcy Law
26 Pages Posted: 25 Mar 2013 Last revised: 30 Jul 2013
Date Written: March 24, 2013
In this paper our goal is to identify the core of corporate bankruptcy law that parties cannot achieve on their own, no matter how robust their contract law. Our approach takes organizational law as starting point and we posit that bankruptcy law is a necessary addition to organizational law. Necessary in that two essential elements of corporate bankruptcy law cannot be achieved by contract: asset stabilization and asset separation.
Asset stabilization refers to the ability to temporarily protect assets as a coherent whole. It includes obvious things like the stay on individual creditor collection, but also other features like the ability to provide post-bankruptcy liquidity to the debtor 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 strictly speaking a discharge is not necessary to achieve asset separation.
From both these elements a number of rules follow that are essential for any bankruptcy system, i.e. an encompassing collective process, a stay of creditors, a liquidity enhancing system of rules, a monitor and asset detachment rules. Other rules are non-essential, i.e. absolute priority rule, reorganization plan rules, debtor-in-possession rules, creditor committees, statutory priorities.
Beyond the core of corporate bankruptcy law, features of the system are a matter of policy, and politics. Understanding where the core is, however, helps to focus policy makers’ attention on the choices involved in structuring an insolvency system. And it moves away from the notion that chapter 11 must be the standard against which all other laws are measured.
Keywords: corporate bankruptcy law, chapter 11, organizational law
JEL Classification: K22
Suggested Citation: Suggested Citation