New US bankruptcy laws that came into effect in October will alter the way companies go through restructuring and might make it harder to enter Chapter 11 bankruptcy protection. In addition the ability of companies to manage their own reorganization will be affected – giving creditors more say after a few months.
The bill also lifts a ban on banks representing entities in Chapter 11 reorganization. In the past such financial institutions were often considered open to conflicts of interest because of previous underwriting or advisory work, leaving representation in bankruptcy proceedings available solely to boutique restructuring firms. Now big banks will be able to compete for such business.
There are many new constraints on companies entering Chapter 11 bankruptcy protection. In the past a company entering bankruptcy protection could be administered indefinitely by company managers, as debtors in possession. But under the new code the company will have only 180 to 210 days after filing for Chapter 11 to maintain exclusive management of the restructuring.
After this, creditors will have the right to propose reorganization plans to be considered by the bankruptcy court. This could lead to instances where creditors stall restructuring to have the chance to propose plans that are more favourable to themselves, critics of the changes argue.