Bankruptcy Group Offers Congress Ideas to Ease Chapter 11

A bankruptcy research group unveiled hundreds of ideas for a “substantial modernization” of Chapter 11 of the U.S. Bankruptcy Code.

The American Bankruptcy Institute’s proposals to Congress, released today, followed more than two years’ research into ways to fix distressed companies, the group said in a fact sheet. They include making it easier to obtain financing during bankruptcy and creating an alternative path for small and medium-sized businesses to reorganize.

The ABI said such cases could go forward without committees and debtors could be freed to propose their own timetables. Founders and other pre-bankruptcy stakeholders would be allowed to retain ownership upon emergence from bankruptcy, it said.

The recommendations address allowing junior creditors to receive distributions when warranted.

The group suggests its proposal can accelerate companies’ exit from bankruptcy under Chapter 11, which covers reorganizations, by adding a rule to avoid drawn-out and often expensive valuation fights between senior- and junior-ranking creditors.

Lower-ranking creditors could get a chance at recovery if, after exiting Chapter 11, the reorganized company’s value increases to a point where they “might have been in the money or received a greater recovery if the firm had been valued at a later date,” the institute said in the report.

Protecting Creditors

This would protect junior creditors from speedy restructurings based on rock-bottom valuations like those of financial and real estate firms after the recession, avoiding costly litigation over valuation, it said.

In the reorganizations of Tribune Co. and presently of Energy Future Holdings Corp., junior creditors have faced costly efforts to get a slice of recovery from the higher-ranked secured creditors by arguing the reorganized company is worth more.

The ABI, based in Alexandria, Virginia, is a 32-year-old research organization with more than 12,000 members that include attorneys, bankers, judges and lenders. The 22-member commission worked since 2012 to adopt 241 recommendations after weighing “what works and what doesn’t work when it comes to fixing financially troubled businesses under the U.S. Bankruptcy Code,” according to the fact sheet.

Breathing Spell

Provisions that would alter the timing of certain post-petition financing and sales that would allow the bankrupt company a “breathing spell” were also proposed.

Financing that requires a trustee to carry out certain tasks or satisfy certain conditions within 60 days of the filing date should be rejected by the court, the ABI said.

A trustee shouldn’t be permitted to conduct an auction or receive sale approval involving all or substantially all of the debtor’s assets within 60 days of petition date, the group said.

“After extensive deliberation, the commission found that in many cases, the potential harm to the estate from a sale that is pushed through the process more quickly than necessary under the circumstances significantly outweighs any potential benefits of such a sale,” it said.

The commission didn’t propose eliminating so-called credit bidding, using debt in place of cash to purchase a bankrupt company’s assets.

Skeptical View

Not everyone is ready to embrace all the ABI’s ideas. Last week, an official at the Loan Syndications & Trading Association, the trade organization for the U.S. corporate loan market, said the proposals “could materially diminish recoveries on secured bank loans -– a foundation of the leveraged loan market.”

Changing the bankruptcy code, which is viewed as the “gold standard” around the world, may “limit American businesses’ access to credit, which would ultimately impair economic growth and job creation at a time when the U.S. economy needs them most,” the LSTA said in a Dec. 5 joint statement with the Commercial Finance Association, a trade group that represents the asset-based financial services industry.

The LSTA said it hadn’t been given an advance copy of the report at the time of its Dec. 5 statement and based its analysis on initial proposals.

The commission will give a live report in a 90-minute webinar on Dec. 10, according to the ABI Website.

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