Cost Sharing and Bankruptcy Law Orientation

Abstract

In bankruptcy, a reorganization procedure is based on the terms of a reorganization plan aimed to save a financially distressed firm. We provide an original approach of the reorganization plan that we treated as a future contract that demands to creditors a certain degree of cost sharing. This paper examines how the sharing of the reorganization plan costs influences the bankruptcy outcome of such firm.The sharing of the costs between creditors and debtor is analyzed by a static theoretical model that uses a Lagrangian approach.We show that debtors have strong incentives to propose reorganization plans which provide an expected gain for creditors higher than the liquidation value of the firm and lower than the payment of the reorganization plan with an optimal sharing degree. Hence, a reorganization plan can be rejected by creditors if the sharing degree is too important.The liquidation of the firm can be avoided if the design of the reorganization plan is improved by performing an appraisal or purchasing the services of an audit company.The novelty of this paper resides in the distinction of two types of bankruptcy legal systems. The first one represents a pro-creditor or a creditor-friendly bankruptcy system in which the claimants' payment is not limited to a fixed value written in the reorganization plan. Conversely, we treated the case of a debtor-friendly bankruptcy system which limits the creditors' payment. The results of our model hold independently of the bankruptcy law orientation, that is, pro-creditor or pro-debtor.

Bankruptcy voting process and corporate reorganization

“…First, such type of analysis neglects firm's financial situation and structure of creditors' claims. In some countries, firms with less assets may not be allowed to reorganize, while the content of reorganization plan may determine the firm's survival (Stef, 2015). In addition, large claimants with strong bargaining power may influence the vote of small creditors.…”

Management-to-staff ratio and a firm's exit

“…Thus, a nonvoluntary exit should usually be avoided as long as possible considering the loss of reputation that managers and directors have to incur (Balcaen et al, 2011). Second, a bankruptcy procedure implies the appointment of a trustee or an insolvency practitioner that coordinates and monitors the settlement of creditors' claims (Stef, 2015). However, voluntary dissolution provides managers the opportunity to organize and coordinate the liquidation of a firm's assets (Blazy & Combier, 1997).…”