Anthony Casey: Bankruptcy on the Side

Bankruptcy on the Side

Judges in large corporate bankruptcies are increasingly being asked to resolve disputes regarding side agreements between creditors or other stakeholders in the debtor. A common example is an intercreditor agreement that allocates the rights to control the bankruptcy process amongst a subset of creditors. The enforcement of these agreements can change the outcomes in large corporate reorganization cases—not only the division of value, but also what happens to the company itself.

An important feature of these agreements is that they often include a promise by one party to remain silent – to waive some procedural right – at potentially crucial points in the reorganization process. For example, the agreements might require a lender to waive its objections to a proposed plan of reorganization or to abstain from supporting or presenting certain proposals for debtor-in-possession financing.

Our new paperBankruptcy on the Side, examines the question of how judges should interpret and enforce side agreements. Using simplified examples, we demonstrate the potential costs and benefits of side agreements. On the benefit side, we show that side agreements can provide effective work-arounds for some of the inefficient mandatory terms in the Bankruptcy Code, as well as solving problems caused by the inherent incompleteness of contracts. To give a concrete example, a second lien lender might agree to be silent in order to commit to not raising objections that – although allowed under the Bankruptcy Code – would stall a value-maximizing sale process.

Read more at Oxford Business Law Blog