This House supports the Chapter 11 bankruptcy laws

In the abstract, bankruptcy occurs when an individual or an organisation is unable to repay sums of money that it has been lent by other individuals or organisations. Formally recognised and regulated debts are often repaid over an extended period of time, with borrowers paying portions of the principal sum alongside an agreed amount of interest. If a borrower cannot meet these obligations, they will be declared bankrupt; creditors will be repaid from the sale of the borrower’s assets – the tangible and intangible property that the borrower owns.

If a company is unable to meet its debts, its assets will be sold in order to repay its creditors – a process known as “liquidation”. Normally, this process will lead to the company being wound up. Its employees will be laid off, trading in its shares will cease and the administrators supervising the company’s bankruptcy will negotiate with its customers and suppliers to release from its existing contractual obligations. For all practical purposes the company will cease to exist. “Traditional” bankruptcies are an everyday feature of

Chapter 11 of the United States bankruptcy code offers businesses approaching bankruptcy an alternate approach to dealing with excessive and unserviceable debts. Rather than permitting the sale or seizure of a business’s assets, Chapter 11 allows the business to continue trading while a court supervises the reorganisation of its debts. Some debts may be reduced, others excused entirely. The process of restructuring may also involve a rehabilitation of the business’s operations, staffing and union agreements and management structures. It is intended that businesses that submit to Chapter 11 bankruptcy proceedings will re-emerge a viable commercial entities once the changes specified by its creditors, stock holders and the courts has run its course.

The creation of the Chapter 11 measures was partly motivated by to create an economically efficient response to business failure. The American congress, debating the amendments that created the Chapter 11 protections, recognised that a struggling business might be more valuable if it were permitted to continue trading, rather than being reduced to a collection of disparate assets, the sale of which would be unlikely to meet the full value of creditors’ debts in any event. Chapter 11 remains very much creditor oriented, however. Creditors of businesses administered in this way are effectively given full ownership of its assets; former owners and operators become “debtors in possession”. Any significant decisions taken on the future or operation of the business must be approved by the bankruptcy courts and by committees and trustees appointed to oversee creditors’ interests. Lawyers acting on behalf of creditors may compel managers and owners to adopt new business practices and strategies.

Modifications made to Chapter 11 in 2006 were intended to prevent creditors and business owners threatening the complete liquidation of a company in order to coerce workers and unions into accepting redundancies and reductions in wages and pension payments.

Even before the bank crisis of 2008 and the ensuing global recession, several large, high profile US companies made use of Chapter 11 filings to reorganise their debt obligations and operations. Examples include petrochemicals firm Texaco corp, United Airlines and Delta Airlines. The collapse of the investment bank Lehman Brothers in 2009 was administered under Chapter 11, although operations of the bank itself were ultimately terminated.