(Reuters) - Lenders are concerned their investments in broken companies would lose protections under proposed changes to U.S. bankruptcy rules.
A 400-page report nearly three years in the making, released on Monday by the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11, laid out hundreds of recommended changes to law, some of which give companies more leeway to impose restructuring plans over creditors’ objections.
The commission also recommends requiring secured lenders to share a piece of their profits with more junior creditors in the event that a bankrupt company regains financial health. Proposed changes also would alter the method for valuing certain payments made to a lenders, reducing some protections.
“It’s a hell of a way to reform a restructuring code that was already the envy of the world,” said Elliot Ganz, general counsel for the Loan Syndications & Trading Association, a loan market trade group.
Members of the commission say reform is fair, and badly needed. The ABI, a trade group of 12,000 bankruptcy lawyers and other restructuring professionals, formed the commission in 2012 amid concerns that rising costs of Chapter 11 were deterring companies from filing for bankruptcy. Of those who do file, more are being liquidated or sold quickly than comprehensively restructured, said restructuring attorney Al Togut, the commission’s co-chairman.
“It used to be that a small company under stress could rehabilitate itself in the bankruptcy court,” Togut said in an interview. “When it did, it was given the chance to operate successfully following emergence.”
The commission plans to present Monday’s recommendations to Congress. Broad legislation moves slowly, and previous changes to the bankruptcy code took years to implement.
While certain of the recommendations could be imposed now — namely, those that aim to interpret currently disputed case law — the bulk of the report will remain for the time being limited to theory, not practice.
Attorney Raymond Lyons, a former New Jersey bankruptcy judge, said that if he were still on the bench he would gladly impose some of the recommendations.
He said he likes the idea of an “estate neutral,” a position proposed by the commission that, on the request of parties, would be appointed to help parties negotiate a restructuring plan. “That’s an experiment I’d like to see tried out,” Lyons said in an interview.
Ganz takes issue with the idea that fewer companies are successfully restructuring in bankruptcy, citing an LSTA study that found only 9 percent of companies who took out large bankruptcy loans between 1996 and 2012 wound up liquidating, while three-fourths restructured successfully.
Keith Sambur, a bankruptcy attorney at Richards Kibbe & Orbe who represents lenders, cited possible uncertainty in the lending community, particularly with respect to the requirement that secured lenders who recover a profit in a restructuring must allocate some of that profit to junior creditors.
“There are questions as to how that’s going to be applied, how it could potentially be enforced, how parties will subscribe value to that allocation,” Sambur said.
But the commission believes the rule will lead to quicker cases by promising the sharing of future upside and removing creditors’ incentives to fight over every dollar in bankruptcy.
In fact, said commission co-Chairman Robert Keach, many of the proposals are similarly aimed at making cases more efficient.
For example, Keach said, by allowing debtors to seek court approval on a restructuring plan without any creditor support, the proposal encourages negotiation and discourages the kind of gamesmanship that has become common in recent years, such as debtors who try to gerrymander creditor classes to promote plan support, or creditors who acquire so much debt that they can single-handedly block a vote.
Reporting by Nick Brown; editing by Andrew Hay