"What's Wrong With Chapter 11?" Or, How the US Bankruptcy Code Has Turned Into the Indian IBC

Readers can begin by going here to read Charles Tabb's masterful (and brief at only 29 pages) paper, What's Wrong With Chapter 11?. Cribbing from the abstract to whet your appetite:

This Article first explains what the congressional reformers of the 1970s dreamed that chapter 11 could and should be, and identifies five core normative goals that chapter 11 should promote. I then examine how chapter 11 has failed, and has become a nightmare rather than a dream, and discuss five critical ways in which chapter 11 in practice fails to achieve the normative ideals previously identified. I conclude by identifying and explaining seven possible reforms that, if implemented, could help transform chapter 11 from the current nightmare to the normative ideal dream.

The problems Tabb identifies are obvious to anyone who, like me, practiced in the 1980s and early '90s, the heyday of reorganizations under Chapter 11. Full-blown Chapter 11 cases from plan to disclosure statement to confirmation are largely a matter of memory. Over the course of the past two decades reorganizations have been replaced by § 363 sales ... sales at the behest of secured creditors and for the benefit of financial investors. And most decidedly not for the benefit of the debtor's unsecured creditors as the Bankruptcy Code originally envisioned.

An initial response might be, who cares? After all, money should go wherever the financial markets direct, right? The short answer is (or should be): anyone who cares about following the well-balanced and highly reticulated rules of the law that Congress enacted. A longer answer would take us too far afield into bankruptcy policy.

But enough from me channeling Charles Tabb. What's this have to do with the Indian Insolvency and Bankruptcy Code, 2016 (IBC)?

After working through the IBC and its regulations. After interviewing Resolution Professionals and attorneys practicing under the IBC. After attending conferences where I was a presenter or panelist. And after reading various judgements from the Adjudicating Authority and the Supreme Court of India, I have come to a conclusion: the IBC is systemically skewed in favor of financial (usually secured) creditors and against operational (unsecured) creditors. (You'll have to wait for the papers that come out of my stay in India as a Fulbright-Nehru Research Scholar (here and here) for the arguments in support of this conclusion.)

It pains me, however, to have to acknowledge that while the US Bankruptcy Code provides a framework for equitable treatment of creditor classes, US bankruptcy practice no longer does so. Secured creditors should never receive less than the value of their collateral. But neither should they receive more (except as they share in the pool with unsecured creditors for any deficiency). Yet, the IBC provisions and US practice permit overreaching by those creditors.

Charles Tabb has some recommendations for what do do about the "nightmare" of current practice under the Bankruptcy Code:

(1) making sales once against just sales again; (2) resurrecting the “perishability” or “emergency” test for sales; (3) limiting secured creditors to foreclosure value; (4) opening up DIP financing terms and eliminating draconian terms; (5) eliminating all preferential priority-altering payments; (6) curtailing venue choice and forum shopping; and (7) eradicating judicial legislation. 

I hold no great hope that these suggestions will gain much traction in the US. The likelihood of progress toward greater equity in India remains an open question.