Competing Systems of Corporate Reorganization: Chapters X and XI of the Bankruptcy Act

Abstract

Corporations may be reorganized both under Chapter X and Chapter XI of the revised Bankruptcy Act. Chapter X is reorganization in the grand manner. It represents the response of its draftsmen to the great reorganization cases and to the atmosphere of melodrama and importance which colors all discussion of them. The Wabash, the Monon, the St. Paul; Bogert and Furlaud and Boyd—for readers of the law reviews and the United States reports, these are words to conjure up "an alluring picture of shady characters, with diamond rings on their fingers, . . . sitting with lips glued to the telephone and weaving their nefarious webs around the world . . ." As a device for protecting the participants in reorganization from each other, Chapter X is in every way an improvement upon its predecessors, the equity receivership and the Section 77B proceeding. Its ritual is more complex and impressive, its substance more satisfying, its promise of protection to investors more emphatic. Chapter XI, on the other hand, has about it the grubbiness of bankruptcy. It provides a cheap and practical method of settlement, based on the history of composition in bankruptcy, for poor debtors whose estates cannot afford the expense of an elaborate public ceremonial, No one will look to Chapter XI as a theatre for the glamor and high language expected of spectacular proceedings under Chapter X. In its large way, Congress intended Chapter X for the reorganization of big corporations, and Chapter XI for the relief of small debtors, incorporated and unincorporated. But the forty-odd experts who worked eight years revising the Act omitted from it any formula for determining which corporate debtors should be rehabilitated under Chapter X and which under Chapter XI. As things stand, Chapter X and Chapter XI offer alternative systems for the reorganization of corporations generally, and it is established practice for similar corporations, in comparable financial difficulties, to be reorganized under either chapter. Yet the two reorganization chapters are violently inconsistent. They provide incompatible procedures and they appear to contemplate opposite results. They were drafted by different groups, with different objects, and according to different models. Unless the courts prove acrobatic in devising machinery omitted from the Act, effective administration of the two chapters will not be possible until the Statute is suitably amended.