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More on the Impact of Bankruptcy Reform in Canada

Listed author(s):
  • Jocelyn Martel

The0501n objective of the new Bankruptcy Act (Bill C-22) is to promote the use of financial reorganization in order to increase the chances of survival of businesses that are experiencing financial difficulties and, as a consequence, to save jobs. Data from a sample of 417 commercial bankruptcies and 393 financial reorganizations are used to determine whether or not this represents an improvement over the previous system and whether or not the objective to increase the proportion of reorganizations will be met. Results from the statistical and logit analyses suggest that (i) the new voting requirement will increase the number of accepted proposals by 1.5 percentage points, (ii) the change in Crown priority will raise the success and acceptance rate by 2.32 and 0.79 percent respectively and (iii) the changes relating to stay of proceedings are expected to raise the use of holding proposals and thus reduce the likelihood of acceptance of a proposal by unsecured creditors. Finally, that there are several reasons to believe that encouraging firms that would otherwise have opted for bankruptcy to reorganize will not be an efficiency gain for the Canadian economy. L'objectif principal poursuivi par la réforme à la Loi sur la faillite (Bill C-22) est de promouvoir la réorganisation au détriment de la faillite pour les entreprises en difficultés financières afin d'accroître leurs chances de survie et ainsi de sauver des emplois. Les résultats des analyses statistique et économétrique d'une banque de données originales comprenant 417 dossiers de faillite commerciale et 393 dossiers de réorganisation commerciale concluent que (i) l'introduction d'un nouveau critère d'acceptation d'une proposition de réorganisation augmentera la probabilité d'acceptation de 1.5 points de pourcentage ; (ii) les changements apportés à la priorité des créances du gouvernement entraîneront une augmentation de la probabilité de succès et d'acceptation d'une proposition de l'ordre de 2.32 et 0.79 pour-cent respectivement ; et (iii) les changements quant au gel des procédures des créanciers pourraient se traduire dans une augmentation de proposition de type provisoire ce qui devrait diminuer la probabilité d'acceptation de la part des créanciers. Finalement, tout laisse croire que la promotion de la réorganisation financière entraînera une augmentation des coûts de faillite au Canada.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 94s-17.

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Length: 20 pages
Date of creation: 01 Jan 1994
Handle: RePEc:cir:cirwor:94s-17
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  1. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
  2. Cannings, K. & Montmarquette, C. & Mahseredjian, S., 1994. "Major Choice: Undergraduate Concentrations and the Probability of Graduation," Cahiers de recherche 9419, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Fisher, Timothy C G & Martel, Jocelyn, 1995. "The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(1), pages 112-126, April.
  4. Gunderson, Morley & Kervin, John & Reid, Frank, 1986. "Logit Estimates of Strike Incidence from Canadian Contract Data," Journal of Labor Economics, University of Chicago Press, vol. 4(2), pages 257-276, April.
  5. White, M.J., 1992. "Corporate Bankruptcy as a Filtering Device," Papers 92-09, Michigan - Center for Research on Economic & Social Theory.
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