Out of the Past: Railroads & Sovereign Debt Restructuring
24 Pages Posted: 25 Feb 2004
Long before the enactment of the first corporate reorganization statutes in the 1930s, the federal courts developed a method of reorganizing financially distressed corporations, especially railroads, within the existing architecture of the equity receivership. From 1850 to 1932 these receiverships were the only form of relief available to financially distressed railroads, as they were prohibited from liquidating or filing under the Bankruptcy Act.
Several leading scholars have begun to ask if railroad receiverships might hold important insights into the issue of sovereign debt restructuring, or at least inform the analysis. This paper takes a closer look at the analogy between railroads and countries to see if it holds beyond its superficial appeal. In particular, I examine how railroad receiverships addressed the problems of holdouts and individual creditor action, the key stumbling blocks for most of today's approaches to sovereign debt restructuring. I conclude that receiverships overcame these problems in ways that could be useful with respect to today's sovereign borrowers, although the utility of receiverships should not be overstated. Plainly there are historical lessons awaiting application, but I argue that only selective and considered reference to the early days of corporate bankruptcy will translate into meaningful improvement of sovereign debt restructuring.
Keywords: Sovereign Debt, Bankruptcy, Chapter 11, Railroad Receivership, Equity Receivership, Reorganization, Business History
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