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Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.

In the past insolvency resolution process included operations of simultaneous Acts. This was changed and several insolvency laws were consolidated resulting in a single law for insolvency and bankruptcy unlike any other previous laws, These include the Sick Industrial Companies Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, and the Companies Act, 2013. Due to this, some cases were there pending for years. This code is the unification of all these laws which help do a robust mechanism to revive a company if it had to see the fate of insolvency. This code provides genuine rehabilitation and restructuring of the company. The IBC process, like the Australian and UK administration procedures, is not a debtor in possession procedure. Instead, a third-party insolvency practitioner (the Resolution Professional) takes control of the corporate debtor and, within strict statutory time frames, formulates a restructuring plan that creditors need to approve. The IBC process gives substantial power to financial creditors, both domestic and foreign.

Two recent cases decided under the Companies’ Creditors Arrangement Act highlight some potential snares in coordinating U.S. and Canadian insolvency proceedings. In both cases, the Canadian debtors had guaranteed the obligations of their U.S. affiliates, in one case under a secured loan and in the other under a debtor in possession loan. These cases illustrate how the Canadian courts are dealing with the issue of cross-border guarantees and the extent to which they are concerned that the interests of Canadian unsecured creditors be considered.

The US Bankruptcy Code’s chapter 11 procedure is both in practice and conceptually the most important insolvency procedure worldwide. Many countries, including the Netherlands, look at Chapter 11 for inspiration in revising their own insolvency laws. Chapter 11 is, however, itself up for revision. On December 4, 2014, the American Bankruptcy Institute (ABI) issued breaking news for the restructuring and insolvency community in the USA when it presented its Final Report and Recommendations on the Reform of Chapter 11. This article discusses the most principled recommendations that will also be of the most relevance for legislatures and policy makers drawing inspiration from Chapter 11. First of all, the recommendation is discussed for introducing the figure of a so called ‘estate neutral’ as a supplement to the debtor in possession model. Secondly, the introduction of significant restrictions on 363 sales; selling all or nearly of the assets. Restrictions deal both with timing and creditor involvement. As a third recommendation, we single out the introduction of a so-called ‘redemption option’. This option seeks to restore in part the balance between secured and unsecured creditors by giving ‘the immediate out of the money creditors’ a claim on encumbered assets equal to a redemption option. Finally, most novel and most interesting from a company law perspective, is the introduction of an Equity Retention Plan for Small and Medium sized Enterprises (SME’s). The plan seeks to strike a balance between protecting the statutory order of distributions which would normally prevent a distribution to shareholders on the one hand and providing an incentive to shareholders necessary for the successful reorganisation of the company to remain involved on the other. This recommendation thereby provides an exception to the Absolute Priority rule, which usually has as the effect of wiping shareholders out in case of insolvency.

The ability to obtain financing is a critical element in the attempt to successfully reorganise a firm which has declared Chapter 11 bankruptcy. Debtor-in-possession (DIP) financing is one method which has become increasingly popular in recent years. This paper examines whether receiving DIP financing is related to successful reorganisations and a shortened duration under Chapter 11 bankruptcy proceedings. Evidence on these two research questions may then be extended to infer whether or not DIP financing is likely to reduce the costs of bankruptcy. The findings are of interest to managers of firms which are experiencing financial difficulty and their shareholders, as well as current and potential lenders and regulators.

This paper is an introductory survey of bankruptcy and insolvency theory and practice relating to the introduction of Shari'ah principles into secular bankruptcy and insolvency regimes in both jurisdictions that incorporate the Shari'ah, to some extent, into the secular law of the jurisdiction and purely secular jurisdictions. The paper first summarizes some of the Shari'ah principles that are applicable in the bankruptcy and insolvency context. Thereafter, the paper notes the general nature of the secular bankruptcy and insolvency regimes currently in use and summarizes some current practices that are of relevance in the distressed debt, bankruptcy, insolvency, reorganization, restructuring and workout markets, particularly in jurisdictions that have adopted or may adopt a reorganization methodology (such as Chapter 11 or the UNCITRAL model insolvency law). Finally, the paper summarizes certain aspects of the bankruptcy proceeding involving the East Cameron oil and gas sukuk as an example of a secular bankruptcy proceeding involving a Shari'ah-compliant instrument and transaction.

Hong Kong lacks a statutory corporate rescue regime, despite repeated attempts at legislative reform beginning with the the Law Reform Commission’s 1996 recommendations. But each attempt to pass a version of so-called “provisional supervision” failed, mainly due to irreconcilable views of diverse stakeholders on the treatment of labour claims, and in particular on the feasibility of full satisfaction of labour claims as a precondition to entering provisional supervision. In October 2009 the government of Hong Kong tried once again to bridge the differences with proposals set forth in a consultative paper entitled, Review of Corporate Rescue Procedure Legislative Proposals, issued by the Financial Services and Treasury Bureau (FSTB). On 22 January 2010 at the University of Hong Kong, the authors convened a symposium of stakeholders to discuss and comment on the consultative paper. Underscoring the importance of corporate rescue legislation, stakeholders responded enthusiastically. and endeavored to overcome historical impasses with fresh ideas on the treatment of labour claims. The attendees also welcomed a proposal by the authors, that Hong Kong consider adopting a “hybrid” debtor-in-possession (“DIP”) approach to corporate reorganization that would allow management in certain cases and with creditor approval to continue administering the debtor during the statutory rescue process. Following the symposium, the FSTB invited the authors to draft a paper discussing the various proposals on the treatment of labour claims that emerged at the symposium, and to provide a more detailed discussion of the hybrid DIP approach. In this article, submitted to the Hong Kong Law Journal, the authors seek to relay to a broader audience the comments and proposals they initially expressed in their submission to the FSTB. This paper reviews the history of corporate rescue legislation reform attempts in Hong Kong, then discusses the merits and demerits of various proposals for dealing with labour claims, and finally presents and discusses the merits of a hybrid debtor-in-possession approach to corporate rescue. The authors argue that without a DIP option, many companies in distress will not avail themselves of provisional supervision, and that, in many if not most cases, a punitive approach to management is not merited and thwarts the intended goal of a corporate rescue regime.

This article presents the findings of an empirical study of professional fee and expense awards by United States Bankruptcy Courts in 48 large public company bankruptcy cases concluded from 1998 through the first half of 2002. Data was gathered from fee applications and orders in the courts files. Using that data together with case and company data from the Bankruptcy Research Database, the authors constructed regression models of the determinants of (1) the amounts of professional fees and expenses awarded by case and (2) the amounts of debtor-in-possession bankruptcy attorneys fees awarded by case. Two determinants dominate both models: the value of the reorganizing firm's assets and the length of time the case remains pending. Two additional factors contribute to determining the amount of professional fees and expenses, but not debtor in possession bankruptcy attorneys fees: the number of professional firms working in the bankruptcy case and whether the case was in the Delaware bankruptcy court. The ratio of fees and expenses to firm size was subject to a scale effect. As the size of the case increased, the ratio of fees to expenses declined. For the 48 cases studied, total fees and expenses were 1.4% of assets reported on the bankruptcy petition. The average ratio of fees and expenses to assets was 2.2%, but removal of a single outlier reduced it to 1.9%. Controlling for firm size, case duration, and the number of professional firms working, fees were 32% higher in Delaware cases. But controlling only for firm size, the significance of this finding disappeared. Fee cuts were generally small - exceeding 4% of the amounts applied for in only 11% of the cases. The mean fee cut varied significantly by court. Delaware cuts averaged 0.7%, New York 4.5%, and Other Courts 2.3%. The differences in fee cuts among courts was significant, but fees were not significantly lower in cases with larger fee cuts. Based on a comparison of the data gathered in this study with the data gathered by Weiss, inflation-adjusted professional fees and expenses awarded in large, public company reorganizations have fallen by about 57% since the 1980s. Controlling only for firm size, the difference is statistically significant. The decline in fees appears to be associated with the decline in case duration that occurred during the period.