Chapter 11, Corporate Governance and the Role of Examiners
Emory Bankruptcy Developments Journal (EBDJ), Vol. 34, No. 2, pp. 411-460, 2018
52 Pages Posted: 20 Oct 2017 Last revised: 9 Aug 2018
Date Written: October 1, 2017
The debtor-in-possession model causes major corporate governance problems because the debtor’s management has huge incentives to favor some parties over others before or in bankruptcy, e.g. through fraudulent conveyances or preference transfers. Control mechanisms, conversely, are weak. For instance, creditors’ committees are often not appointed, ineffective or conflicted. The bankruptcy court has, however, a strong instrument to detect and undo wrongdoing: the appointment of examiners. They can help to overcome many of these problems because they can neutrally investigate all potential violations of the law. On the other side, their appointment also has downsides, e.g. fees, potential delays, and disruptions in reorganization. Hence, the critical question is how courts can assess whether or not to appoint an examiner. There is no easy answer because the courts have little insight into the debtor’s circumstances. To overcome this information asymmetry problem, I propose the appointment of preliminary examiners. They should be appointed in a majority of Chapter 11 bankruptcy cases. They would conduct a summary investigation to detect potential violations of the law and report their findings to the bankruptcy court. On that basis, the court could make a more informed decision on the initial question of whether to appoint an ordinary examiner and, further, on the scope of her mandate. The main advantage compared to traditional examiners would be the substantially lower costs. This reform proposal would not only help to enrich the estate in the individual case but would also deter wrongdoing in the future. It hence can be understood as a tool to improve corporate governance in financially distressed or bankrupt companies.
Note: This article is published in the Max Planck Private Law Research Paper Series with the permission of the rights owner, Emory Bankruptcy Developments Journal.
Keywords: Bankruptcy, Chapter 11, Corporate Governance, Examiners, Debtor in Possession, Preliminary Examiners, Fraudulent Conveyances, Preference Transfers, Liability
JEL Classification: K22, G33, G34
Suggested Citation: Suggested Citation