Good Old Chapter 11 in a Pre-insolvency World: The Growth of Global Reorganization Options
26 Pages Posted: 4 Jun 2020
Date Written: May 7, 2020
The paper provides a cutting edge look at the ability of existing (and soon to be enacted) legal structures to restructure a financially troubled global business. The basic problem rests on the simple fact that legal systems are country-specific, while businesses operate world-wide. To avoid ripping a viable business apart on geographic lines, debtors and creditors have searched for legal systems that might apply beyond any one nation’s boundaries.
A global business has a choice of reorganization tools. At a basic level, this choice involves chapter 11 as contrasted with the English scheme of arrangement-chapter 15 combination package. Basically English law buttressed by an American "ancillary" chapter 15 bankruptcy case.
But in recent years, leading jurisdictions have proposed (and in some cases even enacted) enhanced “pre-insolvency” procedures, that graft more the features of a full chapter 11 process onto the basic UK scheme architecture. We look at three new procedures in this paper: the pre-insolvency procedures of the Netherlands, Singapore, and England’s own proposal for a new “chapter 11 lite” insolvency system.
We also address the central reason why the chapter 15 “plus” approach to reorganization will tend to prevail over chapter 11. Among other things, we note that most of the foreign procedures that will pair with chapter 15 entail substantially less “process” than chapter 11 itself, which is quite abundant in process. Whether the “chapter 15 plus” package has too little process, or simply less process, is unclear.
While a reduction in the formality of the process might be unattractive from the creditor perspective, from the debtor perspective there are obvious advantages. And it is the debtor, after all, who will largely drive the choice of procedures. Moreover, we observe that debtors are not apt to pay for such moves ex ante – inasmuch as the pricing mechanism is apt to have difficulty transmitting the costs of reorganization back to the point of issuance in any meaningful way.
In short, we explain why chapter 11 seems to be losing a global economic race that it should be winning.
Keywords: chapter 11; chapter 15; schemes of arrangement; financial distress
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