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

This is the final post on commentary around the American Bankruptcy Commission's recent report to reform Chapter 11.

Here are a few more snapshot summaries from some of the ABI’s recommendations:

363 Sales and DIP Financing
With companies facing significant distress due to vast over-leverage, debtors have increasingly turned to asset sales under Section 363 of the Bankruptcy Code, rather than Chapter 11 plans, to dispose of their assets quickly.

The new recommendations recognize this feature of modern bankruptcy practice – company wants to sell all assets and proposes to set up a mechanism to do that. The recommendations seek to slow process down largely out of a stated concern rush sales are fire sales by establishing a 60 day moratorium on sales. The exception is what’s called the melting ice cube, where a firm can show value will disappear quickly. If you can show that is the case, you can proceed with a quick sale.

Valuation – Redemption Option
Under a Chapter 11 plan, secured creditors are entitled to the reogranization value of their collateral. Senior creditors are paid before junior creditors, junior creditors are paid before equity. What the Redemption Option does is provide an artificial way of valuation so you can expand the timeframe for valuation of the enterprise by conceptualizing junior creditors as having an “option” on the potential increase in value of the firm. It is quite complicated, and you can imagine will introduce much complexity in that secured creditors want to resolve the bankruptcy and not have a redemption option hanging over their heads.

SMES and Bankruptcy

Many believe the current small business provisions of the Bankruptcy Code are ineffective. SMEs are currently resorting to non-Bankruptcy Code remedies because according to the ABI report, one of the clear problems with current Chapter 11 bankruptcy laws is that they are too expensive and onerous for smaller companies to make effective use of them. New Generation Research data says 62% of companies that filed bankruptcies in 2013 had revenue below $500,000. ABI says one of the problems with current Chapter 11 bankruptcy laws is that because bankruptcy filing is expense and time consuming, by the time a company files bankruptcy it’s too late to do anything but liquidate.

To help small business file, ABI recommends owners would have 15% voting rights in the new company to keep them involved.

Again if you are really interested in going much deeper, I suggest you access the full report here

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