Movement to Revise Bankruptcy Laws Grows
Myerson, Alan R., THE JOURNAL RECORD
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 bust.
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 savings-and-loan industry.
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 committee's recommendations:
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 bankruptcy reform.
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 years.
Some of the most egregious bankruptcy cases prompt even the law's supporters to suggest some revisions. …