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12 - The interplay of liquidation and reorganization in the bankruptcy systems of Canada and the United States: The role of screens, gatekeepers, and guillotines

Published online by Cambridge University Press:  05 December 2011

George G. Triantis
Affiliation:
Professor of Law and Director, John M. Olin Program in Law and Economics, University of Virginia
Jagdeep S. Bhandari
Affiliation:
Southern Methodist University, Texas
Alan O. Sykes
Affiliation:
University of Chicago
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Summary

Introduction

Over the past decade, legal and economic scholars have raised doubts about the premises that purport to explain formal reorganization schemes. By formal reorganization, I mean a legal process in which an insolvent firm is made solvent by an exchange of existing claims and interests for packages of new claims, new interests, and cash. The initiation of this legal process freezes the rights of creditors to enforce their claims against the firm's assets and provides a framework for the continuation of the firm while the terms of the reorganization exchange are settled. The reorganization plan provides the terms of the exchange and thereby effectively distributes the value of the firm to its claimants in the form of new debt claims, equity interests, and cash. The distribution in the plan must be sanctioned by some majority of creditors; but a plan may be imposed by the court, based on its valuation of the firm's assets and going concern value. The alternative bankruptcy regime is liquidation, in which a judicial or administrative official gathers the property of the debtor, sells it to third parties, and distributes the proceeds to claimants according to their respective priorities.

One premise of formal reorganization is that insolvency is a financial condition that is a somewhat noisy indicator of the economic condition of a firm. The economic condition of a firm is indicated by the value of its assets in their current use relative to their value in the best alternative use.

Type
Chapter
Information
Economic Dimensions in International Law
Comparative and Empirical Perspectives
, pp. 449 - 476
Publisher: Cambridge University Press
Print publication year: 1998

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