Chapter 11's Inclusivity Problem

Abstract

This article rests on four premises: (i) that modern market participants frequently seek legal tools to compromise selected liabilities and not all the liabilities of the firm; (ii) that it is difficult to achieve a selective corporate restructuring in Chapter 11 given its inclusivity; (iii) that selective corporate restructuring strategies are normatively desirable but must only be permitted within strict boundaries; and (iv) that US practitioners have worked around the challenges which Chapter 11’s inclusivity poses to selective strategies but sufficient boundaries have not been placed around these workarounds. While restructuring of long-term financial liabilities is the prime example of a selective restructuring strategy the article demonstrates that it is far from being the only one. Thus, the article represents the first attempt to join currently siloed debates about financial restructuring; landlord restructuring; and restructuring of tort liabilities into a single debate about selective strategies and the need for formal selective restructuring tools alongside traditionally inclusive bankruptcy tools. Having reframed the understanding of modern restructuring practice in the US by reference to selectivity we argue that, in line with developments in other countries, notably the UK, it is high time that the Bankruptcy Code is reformed to accommodate selective restructuring while providing safeguards against its abuse. In other words, it is time to tackle Chapter 11’s inclusivity problem head on.

Keywords: reorganization, reorganisation, restructuring, corporate rescue, company rescue, bankruptcy, insolvency

JEL Classification: K22