Help Center

Modernization of Chapter 11 Needed to Give Distressed Companies a Chance of Rehabilitation According to December ABI Journal

Alexandria, Va. — The trend of financially distressed companies being liquidated rather than rehabilitated in chapter 11 will continue unless the Bankruptcy Code is modernized, according to the lead article in the December edition of the ABI Journal. “The Code must be reformed to encourage earlier filings before the cancer of companies’ financial problems spreads too much and makes rehabilitation impossible,” Al Togut, co-chair of ABI’s Commission to Study the Reform of Chapter 11, and Samantha Rothman, both of Togut, Segal & Segal LLP (New York), write in their article “Chapter 11: Out of Balance.” Togut and Rothman point to how the Code’s rehabilitative powers have been diminished since it was last overhauled in 1978. “The 1978 Bankruptcy Code was carefully crafted to balance the interests of debtors and creditors,” Togut and Rothman write. “It served the interests of all those impacted, including employees, the community, public interest and creditor interests, and did this in a flexible way that balanced all interests while meeting the debtor’s goal of saving its business.” As a result, filings occurred earlier, and management was able to reorganize the business. “Now, more often than not, we see debtors liquidated – either by sale to a third party or outright – rather than be reorganized as was customary when the Code was first enacted,” according to Togut and Rothman. In addition to creditors gaining the upper hand through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Togut and Rothman write that the primary causes for a debtor’s delay in seeking bankruptcy protection are thought to be the managers’ fear of losing control of the company and having it liquidated. “Today’s classic ‘reorganization’ is a liquidation,” they write. “Current management is penalized for its mistakes, and the price of failure is the loss of the company or, minimally, the loss of their jobs and, perhaps, even the jobs of the company’s employees.” Togut and Rothman say that creditors’ financial influences have increased their protection to the debtor’s detriment, diminishing bankruptcy’s value to job preservation through rehabilitation. “Debtors are afraid to file, generally viewing chapter 11 as a death knell rather than a rehabilitation tool.” Debtors will be more inclined to timely seek bankruptcy protection if creditors do not dominate the chapter 11 process, according to Togut and Rothman. “The Code should be reformed to better balance the interests of each constituency in order to increase the prospects for successful reorganization, which, in turn, is beneficial to the economy as a whole,” Togut and Rothman write. The authors point to the efforts of ABI’s Commission to Study the Reform of Chapter 11 and recommendations announced on December 8, to improve the Code to account for today’s evolving corporate climate and to encourage debtors to file before having to liquidate. “The Code should offer more debtor protections to encourage ailing companies to seek relief during earlier stages of financial distress,” according to Togut and Rothman. For more on the principles contained in the final report of the ABI Commission to Study the Reform of Chapter 11, please visit http://commission.abi.org. To obtain a copy of “Chapter 11: Out of Balance,” published in the December issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org. ### ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.