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Should We Abolish Chapter 11 : Evidence from Canada

  • Timothy C. G. Fisher
  • Jocelyn Martel

Over the last decade, Chapter 11 has been the brunt of serious criticism. Some American jurists arguing in favor of revising Chapter 11 have raised the possibility that the Canadian reorganization system might be a good alternative to the existing U.S. system. This article argues that there are fruitful lessons to be learned from the Canadian experience with court-supervised reorganization. Canadian evidence shows that acceptance, confirmation, and consummation rates of proposals are very high. Moreover, firms reorganizing in Canada are almost ten times more likely to survive reorganization than their American counterparts. Furthermore, Canadian data yield no support for the claim that problems with bankruptcy law result from an over-abundance of small firms in reorganization. The analysis also shows that the Canadian reorganization procedure offers a very rapid solution to financial distress and that creditors gain, in expected value terms, from reorganization over liquidation. Based on our evaluation of the relative performance of both systems, we argue that Chapter 11 be revised rather than repealed. Au cours de la dernière décennie, le Chapitre 11 du U.S. Bankruptcy Code a été l'objet de critiques importantes de la part de juristes et d'économistes américains. Récemment, un certain nombre de ces juristes ont soulevé la possibilité de réformer le Chapitre 11 sur la base du système canadien en matière de réorganisation commerciale. Le but du présent article est de démontrer que l'expérience canadienne en matière de réorganisation commerciale est révélatrice sur les réformes potentielles à apporter au Chapitre 11. Les données canadiennes montrent clairement que les taux d'acceptation, de confirmation et de succès des propositions commerciales sont très élevés. De plus, la probabilité de survie des firmes canadiennes en réorganisation est de dix fois supérieure à celle des firmes américaines. Les données canadiennes permettent également de rejeter l'affirmation selon laquelle l'échec de la procédure de réorganisation origine de son utilisation par les petites entreprises. Qui plus est, la procédure canadienne offre une solution rapide aux entreprises en difficultés financières et un rendement espéré aux créanciers supérieur par rapport à la procédure de liquidation. Sur la base de notre évaluation comparative des deux systèmes d'insolvabilité, nous suggérons la révision plutôt que l'abolition du Chapitre 11.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 96s-22.

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Length: 44 pages
Date of creation: 01 Jan 1996
Date of revision:
Handle: RePEc:cir:cirwor:96s-22
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  1. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
  2. Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
  3. White, Michelle J, 1994. "Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 268-95, October.
  4. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  5. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," NBER Working Papers 4097, National Bureau of Economic Research, Inc.
  6. Eberhart, Allan C & Moore, William T & Roenfeldt, Rodney L, 1990. " Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance, American Finance Association, vol. 45(5), pages 1457-69, December.
  7. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-51, Spring.
  8. White, Michelle J, 1983. " Bankruptcy Costs and the New Bankruptcy Code," Journal of Finance, American Finance Association, vol. 38(2), pages 477-88, May.
  9. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
  10. Jocelyn Martel, 1994. "More on the Impact of Bankruptcy Reform in Canada," CIRANO Working Papers 94s-17, CIRANO.
  11. Daigle, Katherine H & Maloney, Michael T, 1994. "Residual Claims in Bankruptcy: An Agency Theory Explanation," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 157-92, April.
  12. Timothy C. G. Fisher & Jocelyn Martel, 1994. "Will the Bankruptcy Reform Work? An Empirical Analysis of Financial Reorganization in Canada," Canadian Public Policy, University of Toronto Press, vol. 20(3), pages 265-277, September.
  13. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  14. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
  15. Eisenberg, Theodore & Tagashira, Shoichi, 1994. "Should We Abolish Chapter 11? The Evidence from Japan," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 111-57, January.
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