Proposed bankruptcy legislation now in Congress, which includes parts designed to expedite bankruptcy proceedings, is flawed by the presence of special interest proposals that would impinge on the efficacy of the 1978 reforms.
A review of the past 15 years of proceedings under the Bankruptcy Reform Act of 1978, against the background of its predecessor statute, Chapter 10 of the Bankruptcy Act of 1898, shows how far we have come in expediting bankruptcy proceedings.
Before 1978, Chapter 10 required that the assets of a financially distressed business be turned over to an "outside trustee." The "debtor in possession," a feature of the Bankruptcy Reform Act of 1978, has shortened, not lengthened, the duration of bankruptcy cases.
Under the current system, Chapter 11 proceedings in major cases are concluded in two to three years, on average. This is in contrast to the seven to 10 years or longer under the old chapter 10 system. (Inland Gas, for example. lasted 41 years).
In enacting the Bankruptcy Reform Act of 1978, Congress was critical of the fact that the old Chapter 10 and its "outside" trustee system not only prolonged bankruptcy proceedings unduly, but resulted in liquidations costing jobs and capital and, in many cases, wiping out creditors altogether.
In introducing the current bankruptcy system in 1978, Rep. Don Edwards, D-Calif., said, the new Chapter 11 system would "protect the investing public, protect jobs, and help some troubled businesses." He added at the time that one "cannot overemphasize the advantages of speed and simplicity to both creditors and debtors."
The Chapter 10 system was extremely cumbersome and was replaced by the current Chapter 11 system in order to streamline and expedite bankruptcy proceedings.
While eliminating the outside trustee and installing the debtor in possession, creditors participating in the 1978 reform processes, mindful of the mischief that could be wrought by continuing management in possession, insisted on certain safeguards.
First of these was a provision for the removal of management for dishonesty or incompetence and replacing it with a court appointed trustee.
Second, the debtor was required to file a plan within 120 days unless that time was extended by the court for "cause."
Third, provision was made for the conversion of a Chapter 11 reorganization case to Chapter 7 liquidation case if the debtor could not properly reorganize.
Fourth, the Securities and Exchange Commission insisted upon a provision for the automatic appointment of an official "examiner" in large public cases to foster the public interest.
Protections that Work
Finally, recent court decisions make it clear that the "adequate protection" to which secured creditors are entitled in Chapter 11 includes protection against undue delay in completing a Chapter 11 case.
By and large, the 1978 reforms have worked in large cases -- though with some notable exceptions. They have greatly accelerated the emergence from bankruptcy proceedings of corporate debtors and maximized value for the benefit of creditors, shareholders, and employees.
This expedited process, as distinguished from the old process in which corporate debtors languished for years and lost values, encouraged more debtors in distress to seek the protection of the new Chapter 11.
While it is true that courts may extend the time in which a debtor is required to file a plan many times during the course of a proceeding, the "cause" for such extensions lies usually in the complexity of the large cases.
This is not to say, of course, that there is not room for improvement and that abuses of the system have not occurred.
Unfortunately, the legislative proposals now pending before Congress also include special interest legislation that would significantly restrict the relief traditionally offered to distressed corporate debtors. Indeed, the current hype for "reform" is driven by special interests.
The proposed "reform" legislation will, on balance, do more harm to the system than good and will result in more liquidations than rehabilitations.
Mr. Jerome is chairman of the City Bar Association Committee on Corporate Reorganization and Bankruptcy and is the head of the bankruptcy and reorganization group at Milbank. Tweed, Hadley & McCloy, New York.