Part V - Alternatives to bankruptcy and the creditors' bargain

Summary

Despite the arguable benefits from breaches in absolute priority described by the chapters in Part III and the possibility of private workouts or expedited bankruptcy proceedings described by the chapters in Part IV, the bankruptcy reorganization process is costly for many firms. A number of chapters in Part II provide details about those costs. This part explores the possibility that alternatives to bankruptcy can provide investors with the benefits from the bankruptcy process without the costs that this process imposes on at least some firms.

The first five chapters in this part explore the idea that market valuations can simplify the insolvency process. If the market established a value for an insolvent firm's assets, many of the disputed issues in a bankruptcy reorganization would disappear. In the simplest case, a bankruptcy court could auction an insolvent firm for cash, then distribute the cash to claimants in accordance with the claimants' contractual priorities. The purchaser and not the court would have the problem of restructuring the firm's finances. And the court would not have to decide the value of the property it distributed; there can be no debate over the value of cash. With this theme of simplification in mind Michael Jensen, “Corporate Control and the Politics of Finance,” Douglas G. Baird, “The Uneasy Case for Corporate Reorganizations,” Mark J. Roe, “Bankruptcy and Debt: A New Model for Corporate Reorganization,” and Lucian A. Bebchuk “A New Approach to Corporate Reorganizations” offer various schemes to value an insolvent firm through the sale or distribution of unvalued interests in a bankrupt firm.