Professor Mark J. Roe, Harvard Law School
Will present the paper: “Three Systems of Bankruptcy -Or Is It Four?”
26th May 2015 at 12:00
Room: To be confirmed
79 avenue de la République 75011 Paris
Abstract: Absent bankruptcy law, creditors would race to the courthouse, as the bankruptcy cliché has it, to sue, to obtain a judgment, and then to levy on the debtor’s property. Such a race would destroy the firm’s remaining organizational value in modern, complex firms, forcing it to close down even if not economically warranted. It would do so to the detriment of the firms’ slower moving creditors, the firms’ owners, and surely their employees, customers, and place in the economy. But in a modern bankruptcy we instead hold the firm together, decide whether it is worth continuing, and, if it is, restructure its ownership. Creditors become shareholders and shareholders take a diminished position or are wiped out.
While the traditional gross categorization for bankruptcy is into reorganization and liquidation, there are better lines on which to categorize the process. Three decisionmaking systems have arisen to accomplish a restructuring and to choose between liquidation and restructuring — administration, a deal among the firm’s dominant players, and a sale. Each is embedded in the Bankruptcy Code today, all have been in play for more than a century, with each having had its heyday, with one system or the other rising, dominating, and then falling from prominence over the twentieth century, and with those shifts, rises, and falls due to baseline institutional and market capacities, political ideology, and political economy. Keeping these alternative decisionmaking types clearly in mind not only facilitates a better conceptual understanding of what bankruptcy can and cannot do, but it also facilitates stronger policy decisions today, as some tasks are best left to the market, others are best handled by the courts, and still others can be left to the inside parties to resolve. We examine recent developments to see where clearer thinking on the decisionmaking choice could have led to better policy decisions.
We then ask whether we have four decisionmaking systems, not three? We do indeed have four, and in the fourth recently emerging system the individual creditor can, without bankruptcy law impeding it, immediately enforce its state-based rights. The creditor takes no part in that collective bankruptcy proceeding to hold together the enterprise value. This development is no longer a minor bankruptcy curiosity but is far along, and played a major role in the 2007–2008 financial crisis. This fourth system seems modern to bankruptcy players’ eyes today, but at base it returns a major part of reorganization to the race-to-the-courthouse structure of the nineteenth century prebankruptcy era. We examine why, and why not, that return can be justified.
Organizers: Prof. Gunther Capelle-Blancard (Université Paris I Panthéon-Sorbonne, Labex ReFi), Prof. Christophe Moussu (ESCP Europe, Labex ReFi), Arthur Petit-Romec (ESCP Europe, Labex ReFi)