By: Richard A. AJAYI, Seyed MEHDIAN, Luminita ENACHE
Keywords: Liquidation, reorganization, pre-packaged bankruptcies, workouts, financial distress
This paper presents a comprehensive analysis of reorganization provisions
available to financially distressed firms in three major economies – the U.S. the U.K., and
Japan. The paper addresses a central question of the relative effectiveness of the various
bankruptcy laws in resolving corporate financial distress and providing opportunities for
efficient and timely reorganization.The results indicate that in each of the three economies
included in this study available opportunities seem to focus on improving the odds of
rehabilitating viable but distressed firms.In the U.S. Chapter 11 provision, debtor in control
feature is beneficiary to equity holders of the firm, since management’s goal is to maximize
shareholder value. Under the U.K. bankruptcy code, creditors have complete control of the
firm and the sole objective of creditors is to liquidate the firm and secure their claims.
Majority of the firms which enter insolvency process are liquidated even if they could have
benefitted from reorganization. In Japan, the creditors of the firm are usually the equity
holders’ of the firm at the same time, due to its unique “main bank” system. Firms under
financial distress are less likely to go through formal reorganization procedure.
The U.S. has a debtor friendly bankruptcy codes while in the U.K. and Japan, creditors have
the superior power under bankruptcy filing. Therefore, creditors and bankers are more likely
to invest in the U.K. and Japan, while equity holders are more likely to favor investment in the
U.S. The paper also presents empirical regularities or lack thereof in the dynamic of
bankruptcy resolution evolution and growth rate of GDP in the three major markets.
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