The new bankruptcy code came under attack from lawyers, who complained that it will make bankruptcy proceedings more costly, lead to more litigation and will likely increase the number of pre-packaged bankruptcies. Since the new bankruptcy law came into effect Oct. 17, several large companies have filed for bankruptcy, including Refco, McLeodUSA, Calpine Corp., Pliant Corp., and Musicland Group. Frederick Holden, partner at law firm Orrick, Herrington & Sutcliffe, said the new code will make it far more difficult for corporations to reorganize and creditors' recoveries will be reduced. "It will far more difficult to achieve fair value," he said.
A provision of the code that came under attack the most is the restriction put on companies to extend their plans of reorganization. Under the old law, a debtor had the exclusive right to file a plan of reorganization during the first 120 days after the start of the bankruptcy case and courts frequently extended this period. Under the new law, the debtors' exclusive period to file a plan may not be extended beyond 18 months after the petition date. Also, the period for creditors to agree to the plan may not be extended more than 20 months after the petition date.
Holden said the provision will cause debtors to rush out a plan before they are ready. "Debtors, in a rush not to lose exclusivity, will file plans prematurely," said Holden, adding that the plans they file may not solve their problems adequately because they have been hurried through.
Another big problem with the code is the requirement that creditors' committees provide non-member creditors access to committee information and solicit comments from non-members, explained Lorraine McGowen, a partner at Orrick. McGowen said that in several recent bankruptcy cases, the debtor has filed motions to limit the confidential information it is required to provide to non-members. She said that this provision of the code affects trade claims in particular. The code is bad for those creditors that buy and sell trade claims based on confidential information. Normally, there is a wall between creditors that intend to trade these claims and those that negotiate with debtors based on public information. Those trading on public information can complain that competing creditors are not providing enough confidential information, creating more cost and delay to bankruptcy proceedings, said McGowen.
Harvey Miller, vice-chairman and managing director of Greenhill & Co., complained that the code favors secured creditors at the detriment of unsecured creditors. He predicted the code will increase the number of companies being sold. This is partly driven by the fact that more companies operate in service-based industries and do not have hard assets that can be used as collateral. "There is a new dynamic now of active auctions," said Miller.