Introduction

The concern of this article is the way in which corporate reorganizations divide the reorganization pie. The article puts forward a new method for making the necessary division. This method can address some major efficiency and fairness problems long thought to be inherent in corporate reorganizations. Although the method is proposed as a basis for law reform, it can also be used under the existing rules.

Reorganization is one of the two routes that a corporation in bankruptcy may take. When a corporation becomes insolvent and bankruptcy proceedings are commenced, the corporation is either liquidated or reorganized. In liquidation, which is governed by Chapter 7 of the Bankruptcy Code, the assets of the corporation are sold, either piecemeal or as a going concern. The proceeds from this sale are then divided among those who have rights against the corporation, with the division made according to the ranking of these rights.

Reorganization, which is governed by Chapter 11 of the Bankruptcy Code, is an alternative to liquidation. Reorganization is essentially a sale of a company to the existing “participants” – all those who hold claims against or interests in the company. This “sale” is of course a hypothetical one. The participants pay for the company with their existing claims and interests; in exchange, they receive “tickets” in the reorganized company – that is, claims against or interests in this new entity.