As far as I understand, Chapter 11 of the US Bankruptcy Code defines the standard operating procedure for corporate bankruptcies in the United States. I'm not too sure about the details, but there seem to be various options available to the court managing the Chapter 11 bankruptcy to retroactively alter loan obligations so as to unburden companies from overwhelming debt. This strikes me as a prime example of moral hazard. Does this procedure have any precedence in common law? Do you see something like Chapter 11 emerging in a free market setting? If not, how will bankrupt companies be forced to repay creditors?
I'm not sure whether Chapter 11 bankruptcy has any precedence in common law, but keep in mind that common law wasn't entirely common. That said, I don't think anything like Chapter 11 bankruptcy would emerge in a free-market setting. Business assets would be liquidated to creditors until there is nothing left to liquidate. At that point, any outstanding debts would fall on the owner(s) of the business and would be handled like any other debt.
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What are the options to retroactively alter debt obligations?
Common law is different than commercial law.
Autolykos, you're assuming that the creditors wouldn't be willing to modify their terms so the business could survive. This certainly wouldn't happen in all cases, but it would happen.
Good point, BioTube. I didn't address that possibility. However, I didn't mean to come off as assuming the opposite. Certainly a creditor is free to show leniency to (one/some of) its debtors.
The purpose of bankruptcy protection law is to prevent a race between creditors to seize assets before any others and thus destroy the capital they are owed. If a corporation owes more than it has in assets, it follows that some creditors will not be paid. It is better in that case for a bankruptcy judge to arbitrate between these creditors and settle on some reduced debt for all of them, instead of the fastest creditor getting his money back and the other ones claiming that he has taken what is owed to them.
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Good point, Stranger. I was under the impression that Chapter 11 bankruptcy allowed at least some of the bankruptee's debts to be completely forgiven. I have no problem with specialized bankruptcy arbitrators that are paid to "balance out" the bankruptee's assets between competing creditors.
EDIT: Based on this, it seems we're talking about Chapter 7 bankruptcy.
I'm not. Chapter 11 bankruptcy prevents the destruction of an enterprise, while Chapter 7 liquidates it.
No one mentioned that in Chapter 11, creditors sometimes are awarded ownership of the firm. This is beneficial to them when the business is worth more as a going concern.
A recent example I can think of is Visteon Corp.
Since the creditors can benefit in this way from Chapter 11, I can imagine something similar being created in a free market, perhaps as part of the bond/note contracts. Just as shareholders are granted a vote, bondholders would be granted a vote based on the value of debt outstanding, with options for voters to either liquidate or convert their debt to equity.
A Chapter 11 bankruptcy makes sense in the following scenario: suppose that mad CEO has decided to make a huge bet on a new venture by borrowing huge amounts of money. Now, it turns out that the ventury is profitable, except the income generated is exceeded by the debt payments. It makes absolutely no sense in this case to liquidate the business, since it generates profits. The only thing that makes sense is to remove the CEO and convert debts into ownership to compensate the creditors.
If a business loses money quarter after quarter and can no longer pay its employees, then it must be liquidated.
Stranger:I'm not. Chapter 11 bankruptcy prevents the destruction of an enterprise, while Chapter 7 liquidates it.
Do you think businesses would have "legal personhood" in a free-market society?
M1ThinkTank:No one mentioned that in Chapter 11, creditors sometimes are awarded ownership of the firm. This is beneficial to them when the business is worth more as a going concern. A recent example I can think of is Visteon Corp.
Since I don't think businesses would have "legal personhood" in a free-market society, I don't see how they can be owned per se. What it would mean to "own a business" in a free-market society would be to own certain assets (property) placed under a certain label.
On another note, who decides whether ther business is worth more as a going concern? The creditors? The bankruptcy judge? I'm not asking this as a criticism, just to get more information.
M1ThinkTank:Since the creditors can benefit in this way from Chapter 11, I can imagine something similar being created in a free market, perhaps as part of the bond/note contracts. Just as shareholders are granted a vote, bondholders would be granted a vote based on the value of debt outstanding, with options for voters to either liquidate or convert their debt to equity.
Very good point. Of course, shareholders don't have to be granted voting rights.
Why would they not have legal personhood? Big business is impossible without it.
Legal personhood is loophole around common law because under common law only persons can own property. There is no reason for it to exist under a more rational legal system.
Stranger: Do you think businesses would have "legal personhood" in a free-market society? Legal personhood is loophole around common law because under common law only persons can own property. There is no reason for it to exist under a more rational legal system.
Technically, this is incorrect. A "person" is a legal fiction. It's a name given to a human being (a living soul) so that they can transact with property in a commercial society.
scineram:Why would they not have legal personhood? Big business is impossible without it.
I don't think the creation of new entities (easily) is going to be possible where there is polycentric legal order.
Autolykos: Stranger:I'm not. Chapter 11 bankruptcy prevents the destruction of an enterprise, while Chapter 7 liquidates it. Do you think businesses would have "legal personhood" in a free-market society?
I used to think they would. Now I am almost certain they would not. Being able to transact through avatars without liability is the foundation of the state.
liberty student:Technically, this is incorrect. A "person" is a legal fiction. It's a name given to a human being (a living soul) so that they can transact with property in a commercial society.
Would it be more accurate to use the term "natural person"? That is, under common law, only natural persons can own property?
liberty student:I used to think they would. Now I am almost certain they would not. Being able to transact through avatars without liability is the foundation of the state.
I completely agree. It wasn't until I read some of Frank van Dun's works that I realized the state is the original limited-liability corporation.
Autolykos: liberty student:Technically, this is incorrect. A "person" is a legal fiction. It's a name given to a human being (a living soul) so that they can transact with property in a commercial society. Would it be more accurate to use the term "natural person"? That is, under common law, only natural persons can own property?
A "natural fiction" doesn't make any sense to me. I think Black's law dictionary was updated so that a person is now a "natural person" btw.
liberty student:A "natural fiction" doesn't make any sense to me. I think Black's law dictionary was updated so that a person is now a "natural person" btw.
Are you implicitly defining "person" as "fiction" above? If so, why? Note that my own definition of "person" is "human being".