The Rise of Bankruptcy Directors

58 Pages Posted: 16 Jun 2021 Last revised: 4 Feb 2022

See all articles by Jared A. Ellias

Jared A. Ellias

Harvard Law School

Ehud Kamar

Tel Aviv University - Buchmann Faculty of Law; European Corporate Governance Institute (ECGI)

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law; Harvard Law School, Program on Corporate Governance

Date Written: January 27, 2022

Abstract

In this Article, we use hand-collected data to shed light on a troubling development in bankruptcy practice. We show that distressed companies, especially those controlled by private-equity sponsors, often now prepare for a Chapter 11 filing by appointing bankruptcy experts to their boards of directors and giving them the board’s power to make key bankruptcy decisions. These directors often seek to wrest control of self-dealing claims against shareholders from creditors. We call these directors “bankruptcy directors” and conduct the first empirical study of their rise as key players in corporate bankruptcies. While these directors claim to be neutral experts that act to maximize value for the benefit of creditors, we argue that they suffer from a structural bias because they often receive their appointment from a small community of repeat private-equity sponsors and law firms. Securing future directorships may require pleasing this clientele at the expense of creditors. Indeed, we find that unsecured creditors recover on average 20% less when the company appoints a bankruptcy director. While other explanations are possible, this finding shifts the burden of proof to those claiming that bankruptcy directors improve the governance of distressed companies. Our policy recommendation, however, does not require a resolution of this controversy: we propose that the court regard bankruptcy directors as independent only if an overwhelming majority of creditors whose claims are at risk supports their appointment, making them accountable to all sides of the bankruptcy dispute.

Keywords: Boards of Directors; Chapter 11; Bankruptcy; Corporate Governance; Conflicts of Interest; Board Governance

JEL Classification: K22; K20; M100; G33; G30; G34

Suggested Citation

Ellias, Jared A. and Kamar, Ehud and Kastiel, Kobi, The Rise of Bankruptcy Directors (January 27, 2022). European Corporate Governance Institute - Law Working Paper No. 593/2021, UC Hastings Research Paper Forthcoming, Southern California Law Review, Vol. 95, No. 5, 2022, Available at SSRN: https://ssrn.com/abstract=3866669 or http://dx.doi.org/10.2139/ssrn.3866669

Jared A. Ellias (Contact Author)

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.jaredellias.com

Ehud Kamar

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel
972-3-6407301 (Phone)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

HOME PAGE: http://https://en-law.tau.ac.il/profile/kastiel

Harvard Law School, Program on Corporate Governance ( email )

1575 Massachusetts
Cambridge, MA 02138
United States

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