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

5 Restraining the State and Utilities

Creditors can enjoy a strong position in bankruptcy and reorganizations by virtue of statutory law. That is, they are legally empowered and prioritized so that their property claims get satisfied ahead of others. We call this de jure strength. But even when their legal position is not especially strong, creditors can exploit other resources in order to gain an advantage inside bankruptcy. They might, for example, use their powerful market position to push ahead of other creditors. This we call de facto strength.

This chapter contrasts these two types of strength as they are exercised in bankruptcy by the state and utility companies. In varyingdegrees, these two monopolies--one over coercion and the other over markets for critical services--share an attribute in common: their sheer institutional power affects the probability of rescuing businesses, for in exploiting their economic strength either may confound the efforts of professionals or managers to turn companies around.

While the state takes on many guises in bankruptcy law and practice, its role as a creditor affects, at the very least, how much cash is available for corporate reorganizations, not to mention other creditors in a liquidation. Utilities, too, can determine the difference between life and death for a struggling company. If they monopolize the supply of water, power, and phone services, then companies cannot do business without them. A threat to discontinue service represents a powerful lever for utilities to pursue their own narrow interests in ways that can doom reorganizations and effectively jump the queue over the legal rights of other creditors.

Meta-bargaining over property rights in bankruptcy therefore embroiled many classes of creditors, and reformers, in complex negotiations over ways to reconcile discrepancies in law and practice that surfaced in public hearings and inquiries over the equity and effectiveness of these two powerful actors.


THE STATE AS PLAYER AND REFEREE

The state is a singular creditor in bankruptcy. When a corporation goes bankrupt,1 the state is frequently one of the creditors. Financially

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1
We use the expression, "going bankrupt," as a shorthand for several different legal "states," including voluntary filings by managers and directors to obtain protection of

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