The American Bankruptcy Institute has proposed reducing some protections for secured lenders as part of its recommendations for reforming the U.S. bankruptcy system.

bankruptcyCODEIn a 400-page report that includes hundreds of recommended changes to bankruptcy law, the ABI’s Commission to Study the Reform of Chapter 11 said companies should be given more leeway to impose restructuring plans over creditors’ objections.

The recommendations “when taken in concert, would significantly improve Chapter 11 and make it a more viable and effective restructuring option for distressed companies of all sizes, including small and medium-sized enterprises,” the report says.

Under the ABI’s plan, Reuters noted, secured lenders would be required to share a portion of their profits with more junior creditors in the event that a bankrupt company regains financial health. Proposed changes also would alter the method for valuing certain payments made to lenders, reducing some protections.

The plan has raised some concerns among lenders. “It’s a hell of a way to reform a restructuring code that was already the envy of the world,” Elliot Ganz, general counsel for the Loan Syndications & Trading Association, told Reuters.

In an email, the Commercial Finance Association blasted the report: “While we were not provided an advance copy the commission’s report, it is our understanding that it proposes major reforms of a system that, at most, needs modest tweaking. Indeed, many of the report’s recommendations are solutions in search of a problem. Moreover, some of the recommendations would undermine the Bankruptcy Code’s fundamental protections for secured creditors’ rights — protections that are central to the success of our bankruptcy system.”

Keith Sambur, a bankruptcy attorney at Richards Kibbe & Orbe who represents lenders, said it was unclear how the proposed allocation of profits to junior creditors was “going to be applied, how it could potentially be enforced [and] how parties will subscribe value to that allocation.”

The commission believes the rule will expedite bankruptcy cases by promising the sharing of future upside and removing creditors’ incentives to fight over every dollar in bankruptcy.

The ABI formed the commission in 2012 amid concerns that rising costs of Chapter 11 were deterring companies from filing for bankruptcy. Of those who do file, more are being liquidated or sold quickly than comprehensively restructured, commission co-chair Al Togut said.

The commission plans to present its recommendations to Congress but any changes to the bankruptcy code could take years to implement.

Source: Reuters

Image: Thinkstock

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