Never have corporate deadbeats been treated so charitably as
during the last decade, an era not otherwise known for indulging
the downtrodden and the impoverished.
Under Chapter 11 of the Bankruptcy Reform Act of 1978, derelict
managers have kept their jobs while the courts helped them renege
on promises to banks, bondholders, employees, retirees, suppliers,
government agencies _ almost everyone but the lawyers, accountants
and financiers who had the sense to specialize in the art of going
But now a growing list of senators, legal scholars and
investors are seeking to revise corporate bankruptcy laws that
often compounded the harm caused by the debt binge of the 1980s.
In case after case, they say, a law meant to promote survival
turned bankruptcy into management's blunt weapon.
Executives know that under current bankruptcy laws they can
often keep their jobs even after their companies go over the brink.
Rewarding managers for successful gambles but letting them force
the cost of failures onto others invites perilous deals _ as in the
Last month, the Senate Judiciary Committee unanimously passed a
bill setting up a commission to recommend bankruptcy reforms by
1994 _ a drawn-out process, but one that also led to the 1978 law.
The bill provides several measures that would not wait for the
A streamlined process for small companies to reorganize.
Some safeguards for retiree health benefits.
Closer policing of legal and advisory fees.
The bill has reasonable prospects in the Senate; the House is
just beginning hearings.
Already, regulators, investors and legal scholars are deep into
the debate. The Securities and Exchange Commission, which under the
old law told the bankruptcy courts whether reorganization plans
made any sense, is considering rejoining the process. The First
Boston Corp., at a recent bond conference, featured a discussion of
Through 1978, bankruptcy courts were places of harsh judgment,
where companies effectively went on trial. Their creditors, with
the court's guidance, could decide whether to save these businesses
or sell them off in pieces.
The new law turned bankruptcy courts into hospital wards. It
was based on the assumption that most ailing companies could be
restored to health.
To aid recovery, the law gives bankrupt companies immediate
protection against all claims. Management has sole right to file
reorganization plans for 120 days _ which the courts may extend for
Some of the most egregious bankruptcy cases prompt even the
law's supporters to suggest some revisions. …