PrepTest 92+, Section 3, Question 16
Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts; courts generally ordered failed businesses to pay all creditors a set percentage of the amounts owed. Modern bankruptcy laws, by contrast, allow insolvent companies to apply for "reorganization," which establishes a plan for satisfying liabilities while allowing the company to continue operating. Some legal scholars prefer the traditional model, arguing that bankruptcy law's sole task should be to make the largest possible asset pool available for settling creditors' preexisting contractually secured claims—something that is usually precluded by allowing companies to stay in business. Thomas H. Jackson, for example, argues that bankruptcy law is best seen simply as a "collectivized debt collection device." Such a compulsory regime, Jackson argues, guarantees that claims will be fairly adjudicated and that the collection process will be efficient.
Donald Korobkin and others argue that Jackson's account fails to give due regard to the interests of other parties affected by a corporation's bankruptcy, such as suppliers, employees and their dependents, and the community at large—parties whose interests are not represented in the company's contractual debts. Jackson's position, Korobkin argues, calls for a sell-off of assets to satisfy creditors, an approach to business failure that places no value on reorganizing companies to enable them to continue benefiting others by producing wealth, providing employment and tax revenue, and so forth.
Korobkin claims that fairness and acceptability to all interested parties, not just to creditors, can be achieved through the application of two principles. First, a principle of inclusion requires that all parties significantly affected by a company's failure be eligible to have their claims considered. Additionally, a principle of rational planning requires that each party's interests be considered in the context of whether a rational long-term plan could salvage any of the troubled company's remaining potential. The rational-planning principle also mandates that the interests of those suffering the greatest financial distress as a result of the bankruptcy be protected over the interests of those less badly affected.
But while Korobkin's approach is more equitable than Jackson's, it also has significant weaknesses. First, a fair accounting of the interests of other affected parties represents an increase in risk to creditors, since they are likely to recover less in the event of bankruptcy. Under such a regime, creditors charge more for credit, a result that has its own adverse economic effects. Furthermore, Korobkin's scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected by a corporate bankruptcy. With a company's reorganization, for example, some creditors may suffer financial losses while many employees retain their jobs; Korobkin fails to provide a way of deciding when such trade-offs are warranted.
Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts; courts generally ordered failed businesses to pay all creditors a set percentage of the amounts owed. Modern bankruptcy laws, by contrast, allow insolvent companies to apply for "reorganization," which establishes a plan for satisfying liabilities while allowing the company to continue operating. Some legal scholars prefer the traditional model, arguing that bankruptcy law's sole task should be to make the largest possible asset pool available for settling creditors' preexisting contractually secured claims—something that is usually precluded by allowing companies to stay in business. Thomas H. Jackson, for example, argues that bankruptcy law is best seen simply as a "collectivized debt collection device." Such a compulsory regime, Jackson argues, guarantees that claims will be fairly adjudicated and that the collection process will be efficient.
Donald Korobkin and others argue that Jackson's account fails to give due regard to the interests of other parties affected by a corporation's bankruptcy, such as suppliers, employees and their dependents, and the community at large—parties whose interests are not represented in the company's contractual debts. Jackson's position, Korobkin argues, calls for a sell-off of assets to satisfy creditors, an approach to business failure that places no value on reorganizing companies to enable them to continue benefiting others by producing wealth, providing employment and tax revenue, and so forth.
Korobkin claims that fairness and acceptability to all interested parties, not just to creditors, can be achieved through the application of two principles. First, a principle of inclusion requires that all parties significantly affected by a company's failure be eligible to have their claims considered. Additionally, a principle of rational planning requires that each party's interests be considered in the context of whether a rational long-term plan could salvage any of the troubled company's remaining potential. The rational-planning principle also mandates that the interests of those suffering the greatest financial distress as a result of the bankruptcy be protected over the interests of those less badly affected.
But while Korobkin's approach is more equitable than Jackson's, it also has significant weaknesses. First, a fair accounting of the interests of other affected parties represents an increase in risk to creditors, since they are likely to recover less in the event of bankruptcy. Under such a regime, creditors charge more for credit, a result that has its own adverse economic effects. Furthermore, Korobkin's scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected by a corporate bankruptcy. With a company's reorganization, for example, some creditors may suffer financial losses while many employees retain their jobs; Korobkin fails to provide a way of deciding when such trade-offs are warranted.
Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts; courts generally ordered failed businesses to pay all creditors a set percentage of the amounts owed. Modern bankruptcy laws, by contrast, allow insolvent companies to apply for "reorganization," which establishes a plan for satisfying liabilities while allowing the company to continue operating. Some legal scholars prefer the traditional model, arguing that bankruptcy law's sole task should be to make the largest possible asset pool available for settling creditors' preexisting contractually secured claims—something that is usually precluded by allowing companies to stay in business. Thomas H. Jackson, for example, argues that bankruptcy law is best seen simply as a "collectivized debt collection device." Such a compulsory regime, Jackson argues, guarantees that claims will be fairly adjudicated and that the collection process will be efficient.
Donald Korobkin and others argue that Jackson's account fails to give due regard to the interests of other parties affected by a corporation's bankruptcy, such as suppliers, employees and their dependents, and the community at large—parties whose interests are not represented in the company's contractual debts. Jackson's position, Korobkin argues, calls for a sell-off of assets to satisfy creditors, an approach to business failure that places no value on reorganizing companies to enable them to continue benefiting others by producing wealth, providing employment and tax revenue, and so forth.
Korobkin claims that fairness and acceptability to all interested parties, not just to creditors, can be achieved through the application of two principles. First, a principle of inclusion requires that all parties significantly affected by a company's failure be eligible to have their claims considered. Additionally, a principle of rational planning requires that each party's interests be considered in the context of whether a rational long-term plan could salvage any of the troubled company's remaining potential. The rational-planning principle also mandates that the interests of those suffering the greatest financial distress as a result of the bankruptcy be protected over the interests of those less badly affected.
But while Korobkin's approach is more equitable than Jackson's, it also has significant weaknesses. First, a fair accounting of the interests of other affected parties represents an increase in risk to creditors, since they are likely to recover less in the event of bankruptcy. Under such a regime, creditors charge more for credit, a result that has its own adverse economic effects. Furthermore, Korobkin's scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected by a corporate bankruptcy. With a company's reorganization, for example, some creditors may suffer financial losses while many employees retain their jobs; Korobkin fails to provide a way of deciding when such trade-offs are warranted.
Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts; courts generally ordered failed businesses to pay all creditors a set percentage of the amounts owed. Modern bankruptcy laws, by contrast, allow insolvent companies to apply for "reorganization," which establishes a plan for satisfying liabilities while allowing the company to continue operating. Some legal scholars prefer the traditional model, arguing that bankruptcy law's sole task should be to make the largest possible asset pool available for settling creditors' preexisting contractually secured claims—something that is usually precluded by allowing companies to stay in business. Thomas H. Jackson, for example, argues that bankruptcy law is best seen simply as a "collectivized debt collection device." Such a compulsory regime, Jackson argues, guarantees that claims will be fairly adjudicated and that the collection process will be efficient.
Donald Korobkin and others argue that Jackson's account fails to give due regard to the interests of other parties affected by a corporation's bankruptcy, such as suppliers, employees and their dependents, and the community at large—parties whose interests are not represented in the company's contractual debts. Jackson's position, Korobkin argues, calls for a sell-off of assets to satisfy creditors, an approach to business failure that places no value on reorganizing companies to enable them to continue benefiting others by producing wealth, providing employment and tax revenue, and so forth.
Korobkin claims that fairness and acceptability to all interested parties, not just to creditors, can be achieved through the application of two principles. First, a principle of inclusion requires that all parties significantly affected by a company's failure be eligible to have their claims considered. Additionally, a principle of rational planning requires that each party's interests be considered in the context of whether a rational long-term plan could salvage any of the troubled company's remaining potential. The rational-planning principle also mandates that the interests of those suffering the greatest financial distress as a result of the bankruptcy be protected over the interests of those less badly affected.
But while Korobkin's approach is more equitable than Jackson's, it also has significant weaknesses. First, a fair accounting of the interests of other affected parties represents an increase in risk to creditors, since they are likely to recover less in the event of bankruptcy. Under such a regime, creditors charge more for credit, a result that has its own adverse economic effects. Furthermore, Korobkin's scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected by a corporate bankruptcy. With a company's reorganization, for example, some creditors may suffer financial losses while many employees retain their jobs; Korobkin fails to provide a way of deciding when such trade-offs are warranted.
The passage most helps to provide an answer to which one of the following questions?
What is the likelihood that a corporation undergoing reorganization will emerge successfully from bankruptcy?
What percentage of contractually secured debt is recovered on average by creditors of failed corporations?
What arguments does Jackson offer in favor of his approach to bankruptcy law?
What kinds of creditors are most vulnerable to financial losses when a corporation fails?
What are some of the inefficiencies that exist in bankruptcy regimes that place a high priority on the orderly discharge of debts?
0 Comments