ABI recommends Chapter 11 reform

February 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Following a three-year study of the potential for US bankruptcy code reform, the American Bankruptcy Institute (ABI) has concluded that the existing Chapter 11 process is “is out of date, too expensive and needs an overhaul.” Conducted by a committee made up of 22 leading insolvency and restructuring practitioners, the ABI commissioned study of 150 industry professionals was tasked with evaluating US business reorganisation laws and proposing reforms that “will better balance the goals of effectuating the effective reorganisation of business debtors ─ with the attendant preservation and expansion of jobs ─ and the maximisation and realisation of asset values for all creditors and stakeholders.”

Furthermore, the stated goal of the ABI study was not just to further inform the dialogue surrounding Chapter 11 reform and to add to the debate surrounding these important issues, but also to encourage policymakers to consider and adopt a series of recommendations for reforming the bankruptcy code, originally enacted by Congress in 1978.

“A major goal of the committee was to streamline the Chapter 11 process and make it more cost-effective,” said William Brant, chief executive of Development Specialists Inc. and a committee member. “We did think the process had become increasingly expensive and cumbersome and felt that if the debtor can get to us early and get diagnosed early, we can save businesses and save jobs. It’s a lot like going to see a doctor. The faster they get into Chapter 11, the chances of a speedy recovery and chances of success are much improved.”

A 400-page report published on 8 December lists a total of 240 recommendations. Key among these are providing debtors more flexibility in arranging debtor-in-possession financing, clarifying lender rights, disclosing additional information about the debtor to stakeholders, and allowing time at the beginning of a case so the debtor and stakeholders can assess the situation and consider restructuring alternatives.

The report also calls for more timely and efficient diligence, investigation and resolution of disputed matters, enhancing restructuring options by eliminating the need to accept an impaired class of claims to cram down a Chapter 11 plan, as well as encouraging a process for sale of all the debtor’s assets outside of the plan process.

Other recommendations include: providing better checks and balances on rights and remedies of debtors and creditors with valuation concepts to enhance debtors’ liquidity during the case, and permitting secured creditors to realise the reorganisation value of their collateral at the end of the case and provide a value allocation to junior creditors when supported by the reorganisation value.

Also key is a recommendation as to the creation of an alternative restructuring scheme for small- and mid-sized companies to enable them to utilise the Chapter 11 process in a more efficient manner.

“Many of the points the report touches on do not impact the bedrock fundamentals of secured lenders, except for the concept of giving redemption value to junior creditors,” said Keith Sambur, a partner at Richards Kibbe & Orbe LLP.

Although it is unclear at this stage whether any of the report’s recommendations will be introduced in legislation before Congress, or if Congress will make bankruptcy reform a high priority in the coming year, Mr Brant is content, believing that the congressional process of studies and hearings will, in all likelihood, get underway over the next 12 to 18 months. Mr Brant said: “I don’t know where a bill will come from first,” he said. “I don’t think someone will take the 400-page report and put a Senate bill number on it. It will take some time. We’re just framing and focusing the debate.”

Fraser Tennant