As the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 considers the state of business bankruptcy in this country, the narrative on chapter 11 is well-established and oft repeated. According to this narrative, whereas in the past firms filing for chapter 11 came into the bankruptcy process with at least some unencumbered assets, modern firms tend to have capital structures that are entirely consumed by multiple layers of secured debt. Moreover, as secured creditors have come to dominate capital structures, conventional wisdom has it that they have “captured” chapter 11 to the detriment of unsecured creditors. This development has justifiably troubled many scholars on both efficiency and distributional grounds. However, it remains an open question whether the perceived downsides of secured creditor control can be satisfactorily addressed through bankruptcy law reform. In this Article, Professor Walters examines English attempts to use bankruptcy law to adjust the priority and control rights of secured creditors with the aim of improving the welfare of unsecured creditors. The Article starts from the premise that lenders that are powerful enough to bargain for superior control and priority rights inside or outside of bankruptcy will be equally capable of adjusting to legal changes that affect, or are perceived as affecting their interests. Four ways in which lenders will adjust to “adverse” bankruptcy reform are identified: (i) metabargaining; (ii) adjustments to prebankruptcy behavior; (iii) transactional innovation; and (iv) “shape shifting”. In Parts II and III, the Article then illustrates how English lenders have successfully adjusted to statutory erosion of their priority rights through transactional innovation and to statutory attempts to curb their control rights through “shape shifting”. Walters’ conclusion on the efficacy of bankruptcy law reform is cautionary and skeptical. He assesses English attempts to improve the position of unsecured creditors by dampening the rights of secured creditors as a failed conceit.
The full text of this Article is available to download as a PDF.