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Welcome /  Blog /  2015-11-doc9 USA: dispute about Chapter 11 reform started.

2015-11-doc9 USA: dispute about Chapter 11 reform started.

In the USA the fight about Chapter 11 reform started indeed. In our article 'The Reform of Chapter 11: Its Process and the Recommendations Made', in: B. Wessels and R.J. de Weijs (Eds.), International Contribution to the Reform of Chapter 11 U.S. Bankruptcy Code. European and International Insolvency Law Studies 2, The Hague: Eleven International Publishing 2015, pp. 3-40, Rolef de Weijs and I (page 23) note that the Loan Syndications and Trading Association (LSTA) '... was - to say the least not pleased with the ABI Commissions' Report on the Reform of Chapter 11, see also http://bobwessels.nl/2015/10/2015-10-doc6-international-contributions-to-the-reform-of-chapter-11-u-s-bankruptcy-code/. The LSTA now has published a 80-pages report expressing their dissatisfaction. It is argued (i) that the ABI Report is based on the 'perception' that the system has failed, but that this perception is not supported by reliable empirical evidence. On the contrary, so the LSTA, the data that do exist generally support the conclusion that the system is functioning well, that (ii) the principal objective of current U.S. bankruptcy law is the maximization of value for all stakeholders and the principle of non-bankruptcy law regarding the distribution of that value, as reflected in bankruptcy’s 'absolute-priority' rule. Where the LSTA finds that the Commission's Report breaks from those principles (arguing that market changes have led to distributions of value in bankruptcy that are 'subjectively unfair') it denies that the existing clear, objective process that respects non-bankruptcy entitlements wherever possible ís fair, and that (iii) many of the changes proposed by the Commission would reduce recoveries by secured lenders in the event of default, which would necessarily result in the increased cost, and reduced supply, of secured credit. The LTSA also reviews several of the proposals made but concludes that these and other proposals would add cost and complexity to, and lengthen Chapter 11 cases. See for the LSTA report, http://www.lsta.org/uploads/DocumentModel/1860/file/lsta-abi-10615-final.pdf. Arguments (i) and (iii) are typical objections used by the key players with secured rights in many markets: no 'evidence' (as if first hand experience of some 200 experts from all over the country is outweighted by sheer numbers resulting from statistics the reliability might be criticised), and a 'warning' that the proposals will make providing finance more difficult and costly. The heart of the criticism seems to be the challenge to find a balance between the existing 'maximization' of value (in the narrow sense of 'money') and the tendency to take into account also other interests as well, such as continuation of business (and therefore continuation of jobs ánd payments to the taxman). The debate in Europe is rather similar and its outcome can only be achieved by further debate.