Are ABI’s Bankruptcy recommendations too debtor friendly? – Part I

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Recently, the Commercial Finance Association held a webinar to discuss The American Bankruptcy Institute's Commission (ABI) final report to reform Chapter 11, the rules that handle bankruptcy. The report is available here and is over 400 pages long and contains 241 recommendations. The ABI released its proposal following a three-year study of Chapter 11 bankruptcy law.

Why are these recommendations so important? In most Chapter 11 reorganization cases filed, management hopes to bring the business back to solvency and to present a plan of repayment to its creditors. The goal is to help companies get back on their feet and if not, protect secured and unsecured creditors.

Is the American Bankruptcy Institute's Commission view that the code needed fixed (is broken)? Is this a solution in search of a problem? Wholesale changes to a code will change how rating agencies and investors look and price debt.

The CFA and Loan Syndications and Trading Association (LSTA) released the following joint statement to the media regarding the proposed rules:

The United States Bankruptcy Code is viewed around the world as the gold standard for the way it permits the reorganization of distressed businesses, while protecting the legitimate interests of creditors. Indeed, the empirical evidence and academic research demonstrate that Chapter 11 has been remarkably effective - particularly in the wake of the financial crisis in 2008 - in allowing companies quickly and efficiently to address their financial problems, while preserving business operations, saving jobs, and protecting the rights of creditors. The ongoing recovery of the U.S. economy from the depths of the financial crisis is a testament to our well-functioning bankruptcy system.

While we were not provided an advance copy of the Commission's report, it is our understanding that it proposes major reforms of a system that, at most, needs modest tweaking.

In the next several posts we will examine some of the recommendations. It is an extremely complex report and by no means all bad. Some are helpful recommendations as pointed out in the webinar, while others target secured creditors and would limit or reduce their rights in bankruptcy.

Bottom line, it has significant implications. The concern is these recommendations will be used by judges as references and most proposals are debtor friendly not creditor friendly.

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