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

Introduction

The goal of rescuing business courses through both the British and American reforms. From the outset of reforms to their enactment, politicians and professionals repeat the refrain that a new bankruptcy law should help "save business," give companies a "second chance," rehabilitate companies unfortunate enough to be caught by an economic downturn or sudden cash-squeeze, and reorganize companies whose finances or debt-structure have become unmanageable.

Two things must happen to achieve the rehabilitation of corporations. First, more funds or assets must be brought into the estate (the "basket" of resources available to the agents of reorganization) so that reorganizers have the means to turn the company around.1 Second, more flexibility and control must be given to the agents of reorganization. Both of these presuppose a "freeze" or a "moratorium," or a "stay" on the rush of creditors to seize assets and remove them from the control of the reorganizers. Companies and their agents of rehabilitation must be given a "breathing period" in order to take stock, appraise the situation, and develop a plan for reorganization that can be executed without having to fight constant rearguard battles with creditors eager to seize company assets.

More funds in the estate, and more control by reorganizers can in turn be achieved by two broad courses of action. First, more funds can be made available for saving businesses by: (1) taking assets away from the strongest creditors, such as banks, the state, and utilities, and putting them into the estate to swell resources available for reorganization; (2) permitting strong creditors to retain their property right over assets, but persuading or compelling them to delay seizing the assets and to relax their control over use of the assets; and (3) providing incentives to

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1
The agents of reorganization in the United States may be either the managers of the bankrupt firm or trustees. If the creditors approved, managers of the pre-bankruptcy firm can remain in control of the company, and are designated "debtor-in-possession" (DIP). They may act in consultation with the creditors' committee and in a manner consistent with the plan for reorganization accepted by the bankruptcy court. If the court or creditors decide to displace current management, they can appoint in its stead an "independent or disinterested" trustee, who would be proposed by the United States trustee and affirmed by the court. The agent of reorganization in the UK is a new position invented for this purpose--an administrator, is proposed by a firm's managers or creditors and affirmed by the court. Otherwise the secured creditors with a floating charge appoint a receiver who may or may not liquidate the business.

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