Bankruptcy and Insolvency From An International Perspective (Part 1)
by Steven Gilyeart, J.D., Editor, The International Leasing Resource
Editor's Note: This is the first is a multi-part series. 28 March 1999.
Introduction
The Major Issue for a Lessor in Bankrupcty
Approaches to Bankruptcy
Liquidation
Fresh Start
For the Benefit of Creditors
Reorganization
Introduction Bankruptcy and insolvency issues are part and parcel of being in the leasing business. Leasing is a credit-granting business where getting repaid is at the core of the business activity. Sometimes that means trying to get repaid in the unfortunate circumstances of a lessee bankruptcy or similar type of insolvency proceeding. This section will examine the primary issues for a lessor in that circumstance under the various, generalized legal systems of the world.
The Major Issues for a Lessor In a Lessee Bankruptcy The major issues for a lessor in a lessee bankruptcy are really just two: (1) getting the equipment and (2) getting the money. Both can be a significant problem when a lessee has "filed for bankruptcy." Yet, before we delve into the details of those issues, a general understanding of the bankruptcy process is important.
Approaches to Bankruptcy Most countries have a bankruptcy law, sometimes called an insolvency law, which establishes an orderly process for settlement of claims against a person or business that does not have enough money to pay what it owes. Yet, the details and complexity of those procedures can vary significantly from country to country. The United States, along with Great Britain, have the most sophisticated and elaborate of bankruptcy laws and procedures. For example, in the United States there is a separate court system established just to handle bankruptcy cases, a bankruptcy law that runs over a 1000 pages (depending upon typesetting), a separate court procedure manual, three different solutional approaches, (e.g., Chapter 7 for liquidation, Chapter 11 for reorganization and Chapter 13 for wage earner limited repayment plans) and separate, specific laws and procedures for bankruptcies involving municipalities, railroads, stock brokers, farmers and other identified groups. At the other extreme, in some countries the bankruptcy law may be a few dozen pages in length and essentially provide little more than that the debtor hands it property over to a trustee or a group of creditors, who sell everything and divide the proceeds as far as they go. Most countries, at least for now, lie somewhere in between these extremes.
Liquidation The most basic approach to bankruptcy is a liquidation proceeding. The property of the debtor is collected by a responsible person or committee and sold, and the proceeds are then divided amongst the debtor's creditors as far as they will go. That's it. Usually, the individual natural person debtor is left with some basic belongings, known as "exempt property," and is released or "discharged" from further responsibility or liability for obligations and claims from periods before the filling of the bankruptcy proceeding. Although a few countries may take into "the bankruptcy estate" all of the property of the insolvent natural person, such an approach is ill-advised.
"Fresh Start" One of the fundamental concepts of modern bankruptcy law is that of "the fresh start" for the debtor, the idea that the insolvent needs to have an opportunity to start life anew, having learned from its prior financial mistakes, without the crushing debt burdens of past indiscretions. To make that "fresh start" meaningful, the person has to have the basics of life to start with. There is also a practical governmental consideration. If the debtor loses absolutely everything in the bankruptcy proceeding, the person will have to receive public assistance. Although the existence of the exemptions will reduce the assets available for paying back creditors, why should the taxpayers in the country have to bail out the creditor community who helped the insolvent reach that state by advancing loans and other extensions when they should have known better?
For the Benefit of the Creditors Moreover, contrary to popular belief, bankruptcy laws are primarily for the benefit of creditors, not debtors! The main purpose of such statutes is to provide for an orderly disposition of assets to all creditors when there is not enough to go around and to avoid the chaos of a disorderly and uncontrolled seizure of assets here and there by those who have "the quickest trigger finger" or those who are in a lucky circumstance. The goal is fairness and equality of treatment from a regularized process. It is also better that the insolvent not have to run and hide from its creditors and dodge them indefinitely into the future, when the person could become a productive, bill paying--and tax paying--citizen again in the future. The debtor may also need to be available to answer questions and to help sort out the financial mess he made. These are some of the reasons that the release from further liability is provided. The situation is usually different with companies or other legal or juridical persons. In their case, there usually is no exempt property; all of the entities' property becomes property of the bankruptcy estate and available for the satisfaction of creditor claims. There is also no release or discharge of the unsatisfied obligations. In fact, the bankruptcy law may mandate the windup and dissolution of the legal entity as part of the bankruptcy process. It does not require the same "rehabilitation" effort that a natural person justifies.
Reorganization Although the bankruptcy laws of many countries provide only for a liquidation of the insolvent's assets, more modern bankruptcy laws contemplate that the better approach, both for natural and legal persons, may sometimes be to "reorganize" their financial affairs rather than simply start over from scratch. These bankruptcy laws provide an option of continuation of the business activity under court protection from the efforts of creditors to collect monies due and seize and execute claims against assets. It is not "business as usual" though; court oversight is involved, either to a modest or substantial degree, depending on what the contemplated business activity is. As long as the activity is the regular and normal, day-to-day operation of the business in the providing of its goods and services, little court supervision is needed. However, any unusual or irregular sale or purchase of assets will probably require court approval. Periodic reports on the progress of the business in improving its financial condition may also have to be filed with the court. Often there is a committee of creditors also providing an oversight function. Such committees may take a more active role in supervising the debtor's reorganization activities than does the court, as the process of their involvement is not necessarily as formal. Creditor representatives on such committees have a duty to act on behalf of the "collective good" and cannot use their position to advance their own parochial financial interest. Yet, it is unsurprising that the creditors volunteering for that duty typically are the largest creditors, as they have the greatest interest and the most to lose--or recover.
Go to Part Two.
Bankruptcy and Insolvency from an International Perspective (Part 2)
Updated 28 April 1999
