Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States

By Bruce G. Carruthers; Terence C. Halliday | Go to book overview

6 Enabling and Constraining Managers

Insolvent companies confront two fates: one leads to closure and corporate death, the other to reorganization and corporate rebirth. If the former occurs, the firm ceases to function as a going concern. Its assets are liquidated and distributed to pay off creditors, and most if not all of its employees lose their jobs. When firms are reorganized, in contrast, they get another chance at life. Not all their assets are liquidated and most workers remain employed. A successful corporate reorganization benefits almost all interested parties. With a return to profitability, shareholders preserve their wealth, creditors get their money back, suppliers retain a customer, and employees keep their jobs. Such success brings political benefits as well. Unlike liquidated firms, corporations that rebound contribute to economic growth and investment, and hold down the rate of unemployment. Successful reorganizations therefore benefit the elected politicians who in modern capitalist democracies are largely held responsible for the state of the economy (see Block 1987). But if the benefits of a successful reorganization are shared, the risks of failure are not. Should a firm fail a second time, it is the creditors who will lose additional money. A corporate reorganization is like a gamble in which shareholders, creditors, managers, suppliers, and workers all win with success, but where only creditors bear the costs of failure. It is a "can't lose" situation for the former groups, and "can't win" for the latter. Creditors therefore tend to be less enthusiastic about reorganizations than the others.

This rather uneven distribution of benefits and costs affects how different parties view the choice between liquidations and reorganizations. Consequently, it also affects how they view bankruptcy laws which do, or do not, encourage reorganizations. In general, secured creditors favor liquidations. They are more reluctant than others to support a reorganization because they gain the least if it succeeds, and they lose the most if it doesn't. Furthermore, should a reorganization occur, secured creditors will want to control the proceedings so that they can protect the collateral assets that secure their loans, and minimize the potential for further losses. This leads fairly directly to political pressure to make reorganizations hard to initiate, and to subject them to close creditor control. In contrast, shareholders, managers, and workers generally favor reorganizations because they have little to lose and

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