On Tuesday, May 13, Kevin J. Carey, the bankruptcy judge hearing the matter of Dura Automotive in Delaware, signed an order confirming that auto parts’ concern’s most recent plan of reorganization.
Duraâ€™s previous plan fell apart in December for a couple of reasons: one unfortunate, the other tragic. The misfortune of course was the general credit crunch, which made it impossible for the company to raise the $425 million in new debt its previous plan required.
The tragedy was a plane crash in Panama two days before Christmas that killed Michael Klein,, the chief executive of a hedge fund that was to have underwritten the plan.
I donâ€™t want this entry to be about the specifics of Duraâ€™s new plan. It is simply a catalyst for some thoughts about the corporate bankruptcy system in general, and the business of profiting from re-organization in particular.
Is the very existence of a corporate bankruptcy system in the public interest? And, if some system must exist, does it have to be as lenient as the present system seems to be? It is fortunate that debtors’ prisons have receded into the past, of course. What is more, there should be a procedure for the orderly liquidation of chronically insolvent corporations. I concede that.
But wouldn’t it make more sense to expect that the creditors themselves would initiate the process in the normative situation? If the creditors decide there is no other way they’ll get much of their money back, they’ll be the ones to petition for an orderly wrap-up.
The company management represents the owners of equity. In principle they should always care more about seeing to it that the stock retains some value than they care about anything else — even the payment of their bonds. They aren’t working in the first instance for the bondholders. Bondholders don’t vote for directors, etc.
If a corporation’s management is the party that initiates a bankruptcy proceeding, there is already a prima facie case that they think it possible they’ll survive, to be the managers of the re-organized company. As, often. they are. They can do this either while assuring that the original stockholders still get some share of the new company, or despite their failure to ensure that. Logically there is no third choice.
Either of those two possibilities sounds a tad shady — or would but for its familiarity. It would seem then that whenever a corporate entity voluntarily files for bankruptcy either the decision-making management is hoping to help the stockholders cheat the bondholders, creditors, etc., or it is planning to cheat those stockholders. Neither is a good thing, or even a policy-defensible thing.
I’m just asking questions here, in the Socratic “I know that I’m ignorant” spirit. How would the United States change if we simply abolished provisions for voluntary corporate bankruptcies and relied upon creditors to initiate the process? Would the changes as a whole be good or bad?