The Restructuring Report

The world of bankruptcy law has been divided into nine parts since the Bankruptcy Code was enacted in 1978. But is that number fixed by nature? Could there be ten? That would be like discovering another planet! But that may happen.

We currently have nine chapters:

• Chapter 1: General Provisions
• Chapter 3: Case Administration
• Chapter 5: Creditors, the Debtor and Claims
• Chapter 7: Liquidation
• Chapter 9: Adjustment of the Debts of a Municipality
• Chapter 11: Reorganization
• Chapter 12: Adjustment of Debts of a Family Farmer or Fisherman with Regular Income
• Chapter 13: Adjustment of Debts of an Individual with Regular Income
• Chapter 15: Ancillary and other Cross-Border Cases

But is there now the possibility of another chapter from another orbit? A draft of Chapter 16 has been sent to the chairs of the applicable House and Senate committees. It is supported by respectable authorities and does not seem to have any opponents. It would be an important advance in the world of restructuring. Its main challenge would seem to be to get the attention of a dysfunctional Congress.

Chapter 16 is titled “Adjustment of Debts for Borrowed Money.” It would facilitate reorganizations that would restructure only “borrowed money” – bonds or credit agreement debt held by numerous creditors. Other obligations of the same debtor such as secured debt and general unsecured debt of all sorts would be unaffected. What happens when a company needs to get its bondholders to approve an extension of time to pay, a reduction of the interest rate or principal, or a conversion of such debt to equity and a solid majority of the holders would support such a change? Bond documents often require consent by every holder. The Trust Indenture Act would require that in most instances.

The only route is usually a full-blown Chapter 11 case which necessarily draws in all creditors and contract counterparties and requires a complex process. The “borrowed money” situation is usually what prepackaged bankruptcies (pre-packs) are designed to attempt to resolve, but pre-packs too are complex and also bring securities laws into play.

So, a simpler form of “borrowed money” reorganization may be in order. It is somewhat analogous to the “Schemes of Arrangement” which is found in British corporate law (not insolvency law) and is often used in some of the largest international restructurings. Other countries now also have specialized procedures that allow debtors to restructure bond debt with judicial oversight and super majority voting requirements but without the unnecessarily complex processes.

The proposed statute would be a simplified version of Chapter 11 without an estate, automatic stay, avoiding powers, court approval requirements of transactions of various types, or a creditors committee. A plan would be filed with the case and acceptance would be by a super majority of bondholders (either two-thirds or three-fourths). Solicitation could be done before or after filing.

The law has been drafted by the National Bankruptcy Commission a group of approximately 60 leading bankruptcy judges, scholars and practitioners which has often served as “neutral” advisor to Congress on bankruptcy legislation. In March 2019, the proposed Chapter 16 was also endorsed by the American College of Bankruptcy.

So we may need to go back to school on our bankruptcy universe.

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