Bankruptcy is A Much Debated Area of Law

Chapter 1: Introduction

1. Introduction

Bankruptcy is a much-debated area of law since the 19th century. One group debated that it protects farm interests. However, the other group that favoured states’ right debated that it is against the national economy. Notwithstanding the debate, bankruptcy has been proposed as a remedy for economic depression (Skeel, 2014). Currie (2008) states that bankruptcy has been serving multiple and diverse purposes, including debt collection, fresh start to debtors that are in financial distress. Bankruptcy law changes as per the societal attitudes towards the manner of responding towards distressed debtors. For example, the consumer-favoured attitude was changed towards debt collection when there were debates that the consumer debtors were using bankruptcy as the first response to their financial distress instead of the last resort. Currie (2008) states that this claim comes from creditors and legislators who perceived this manner of using bankruptcy to get their financial obligation discharged irrespective of their ability to repay. Seeking law dissertation help offer valuable insights into the complexities encountered in the field of bankruptcy law and its societal implications.

In the US, bankruptcy can be Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15 bankruptcy. Chapter 7 is a liquidation-only process where the estate is controlled by an independent trustee, who is responsible for liquidating the assets of the estate and for overseeing the distribution of the assets to the creditors. There is generally a sale of the assets and may be a cash distribution among the creditors. The bankruptcy law provides for overriding state law by federal laws regarding limitation on foreclosure sales and ability of lienholders to veto the sale of assets on underwater properties (Levitin, 2018, p. 245). The cash distribution is conducted through the Plan of liquidation or reorganization. In case of reorganization, it will propose distribution of assets and claims in the debtor’s capital structure. This plan must be approved by the court and disclosed to the creditors and equity holders (Levitin, 2018).

Chapter 9 bankruptcy seeks to provide protection to a financially distressed municipality from its creditors and enable it to develop and negotiate a plan concerning debt adjustment (United States Courts, 2021). Chapter 11 is the reorganization bankruptcy where the debtor has the possession, the powers and duties of a trustee, and may continue operating the business. The debtor can also borrow new money with approval from the court. In this bankruptcy, a plan reorganization can be proposed. Concerned creditors can vote on the plan. The court will approve the plan only when it needs the required votes and legal requirements. In such bankruptcy, it is either the debtor who voluntarily files the petition, or by the creditors that met required criteria in case of involuntary petition, which is filed by creditors that meet certain requirements (11 U.S.C. §§ 301, 303). Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership (United States Courts, 2021). According to Section 1107 of the Bankruptcy Code, the debtor is in possession, in position of a fiduciary and with the rights and powers of a Chapter 11 trustee. The debtor has to perform accounting for property, claims examining and objecting and filing informational reports (United States Courts, 2021).

Chapter 12 bankruptcy is meant for financially distressed family farmers or fishermen with a regular annual income giving them an opportunity to propose and execute a plan of repayment over three to five years (United States Courts, 2021). Chapter 13 bankruptcy is termed a wage earner's plan enabling individuals to develop a plan of repayment three to five years (United States Courts, 2021). Chapter 15 bankruptcy provides mechanisms to address insolvency cases that involve debtors, claimants, assets and other parties involving more than one country (United States Courts, 2021).

Whatever is the type of bankruptcy, the process starts with the filing of the bankruptcy petition to create a legal entity, termed the bankruptcy estates that accedes to the title and control of the debtor’s property (Levitin, 2018). This filing triggers an injunction against collection activities, which is termed the automatic stay. This stay channels the claims against the debtor and the property of the debtor into the bankruptcy court that enables an orderly adjudication of the claims. This prevents the problem of visiting the court found in non-bankruptcy restructuring. In case there is restructuring instead of liquidating, the stay gives room to the debtor to accommodate financial stress while undertaking operational changes (Levitin, 2018). Creditors can also seek from the court to lift the automatic stay, which is subject to the valuation of the debtor’s property and the availability of adequate protection for the creditors’ interest in the property. During the window of time allowed after the petition is filed, creditors can file claims for obligations allegedly owed by the debtor. Some of these obligations may be or may not be allowed if they are enforceable or not enforceable outside of bankruptcy. The claims that are allowed do not mean that they get paid, but it means that they are eligible to receive a distribution in the bankruptcy (Levitin, 2018).

When it comes to bankruptcy concerning the shipping industry, before the 2008 financial crisis, only those shipping companies that had overleveraged themselves through high yield bonds sought Chapter 11 protection. However, post 2008, varied types of shipping companies have started using Chapter 11 bankruptcy. Regarding their use of Chapter 11, Osborne and colleagues (2016: 424) observe that there are two motivations behind the use. First are the shipowners that seek packaged rehabilitation do so to disclaim shipbuilding contracts or onerous charters using Chapter 11. Second are the owners that seek to survive until an upturn in the market occurs or to pressurize the secured lenders to debt restructuring using Chapter 11.

Bankruptcy concerning the shipping industry cannot be understood from the realms of the ordinary bankruptcy procedures and rules. Franks and colleagues (2015), while studying the resolution adopted bi shipping industry in financial distress in shipping, observed that the territorial nature of assets associated with shipping entities has placed the shipping industry away from the on-shore bankruptcy laws. They further observed that financial distress is subject to the resolution as defined by the contractual relationship between the concerned parties and through private institutional arrangements. For example, through a double mortgage, the bank can hold the mortgages on the vessel and a security interest in the shares of the registered owner. Such security is on the vessel and the title to the vessel. The security arrangements and understanding is specified in the loan agreement. This occurred with the case of Eastwind Maritime Inc., a New York based company. When it went bankrupt, the Scandinavian-based bank Nordea, took the security interests in 12 subsidiaries each owning one vessel (Franks, et al., 2015).

Franks and colleagues (2015) also observed that there is a low economic cost of financial distress in shipping bankruptcy. Such cost is more or less driven by dysfunctional owners and not by uncoordinated creditors. They further observed that the estimated discount is caused by low vessel maintenance and such discount is largely concentrated in low valued vessels and corrupt ports.

Given the private contractual nature involved in the shipping industry concerning bankruptcy, they have to distance themselves from national bankruptcy laws (Chapter 11) to establish their own bankruptcy procedures. This means their contract-based rules differ from the restrictions provided by Chapter 11 concerning the rights of creditors. At the same, the shipping industry has to promote an environment of rule of law (Franks, et al., 2015).

2. Single Vessel Owners – Bankruptcy and challenges

As per the § 300.152 of the 16 U.S.C 1801 et seq, the owner of a vessel is the person who owns the vessel in whole or in part. The vessel may be leased or chartered to or managed by another person or a charterer including a bareboat, time or voyage. The owner can also be a person who acts in the capacity of a charterer or a manager including parties to an operating agreement, management agreement, or a similar agreement bestowing control over the function, destination or the operation of the vessel. Thus, the owner of the vessel can be any officer, manager, director, controlling shareholder, agent and any affiliate of the person mentioned in the definitions above (U S Office of the Federal Register, 2011, p. 1029).

A single vessel owner can file a Chapter 11 reorganization bankruptcy. The owner is in the possession of the vessel and assumes the powers and duties of a trustee while still continuing the operation of the vessel. As Chapter 11 is typically used to reorganize a business, which may be a sole proprietorship, a single vessel owner will find this appropriate (United States Courts, 2021). Under this Chapter 11, the owner has to perform accounting concerning the vessel, and address the claims concerning informational reports (United States Courts, 2021).

Under Chapter 11, the owner will be allowed to reorganize and restructure the finances concerning the vessel under the supervision of the bankruptcy court. This allows the owner to balance the income and expenses while still operating the vessel (Justia, 2018). The owner can file the petition with the bankruptcy court that has the jurisdiction over the domicile of the business or the residence of the owner. The owner’s voluntary petition must include their name and residence, location of principal assets, the plan or the intention to file a plan, and the request for relief (Justia, 2018). The petition also includes financial information such as schedules of assets and liabilities, leases, contracts, income, and expenses, and the statement of financial affairs (Justia, 2018). The owner has 120 days within which they can exercise their exclusive rights to file a plan, as provided under 11 U.S.C. § 1121(b).

Under this Chapter 11, the owner can protect themselves from the creditors’ claims of lawsuit through automatic stay (Justia, 2018). Such stay provides the owner a time period where all judgement, foreclosures, collection activities and repossession of property are suspended. This means that the creditors cannot pursue any of those claims or actions before the filing of the bankruptcy petition (Administrative Office of the United States Courts. Bankruptcy Judges Division, 1998). This period, thus, allows the owner and the creditors to negotiate and resolve the difficulties in the owners’ financial situation (Administrative Office of the United States Courts. Bankruptcy Judges Division, 1998). However, this stay is not absolute. The creditors can get an order of relief from the stay from the court. This can occur in situations where the owner does not have equity in the vessel and the vessel is not necessary for effective reorganization (Administrative Office of the United States Courts. Bankruptcy Judges Division, 1998). In such a case, the creditor can seek from the court to foreclose on the property, sell it and apply the proceeds to pay off the debt (11 U.S.C § 362(d) 27.

Personal assets risks

The challenge in Chapter 11 is that when a sole proprietor files for this bankruptcy, their business and personal assets are put at risk. This is unlike the stockholders of a corporation where their personal assets are not put at risk, but instead their investment in stock. Thus, a sole proprietor may sell some assets to pay off certain parts of the debt owned (Justia, 2018). The reason is that the owner does not have any separate identity unlike the corporation. This means that the proprietorship cannot be legally distinguished from the owner. This exposes their personal assets towards paying debt owed. A further review of this aspect will reveal that a sole proprietorship has fewer recources for debt repayment than a corporation or a company.

More expensive

Chapter 11 is also more expensive and time-consuming than other types of bankruptcy filings.

Automatic stay not absolute

Tax and liability laws

Covid-19 impact

The covid 19 crisis, as observed by Wang and colleagues (2020), has reversed the close link between bankruptcies and the business cycle and unemployment rates. They found similar aggregate filing rates as that in 2019 levels before the onset of the pandemic. However, the rates of filings by consumers and small businesses dramatically dropped. They found that the total number of bankruptcy filings was down by 27% year-over-year between January and August. The Chapter 11 filings comprised a small share of overall bankruptcies. However, filings by the large corporations increased since 2019 at nearly percent year-over-year from January through August. Thus, they observed that there is a diverse perspective regarding consumers, small businesses, and large corporations. While the large businesses continued to seek as well as receive relief as they would have during a normal recession, small businesses faced financial, technological and physical barriers while accessing the bankruptcy system (Wang, et al., 2020).

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