Chapter

Bankruptcy Procedure

Oliver Hart

in Firms, Contracts, and Financial Structure

Published in print October 1995 | ISBN: 9780198288817
Published online November 2003 | e-ISBN: 9780191596353 | DOI: http://dx.doi.org/10.1093/0198288816.003.0008

Series: Clarendon Lectures in Economics

 Bankruptcy Procedure

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There are circumstances, arising perhaps from an unexpected shock, in which companies default on their debt. This chapter discusses the need for, and goals of, a formal bankruptcy procedure. A bankruptcy procedure should aim to achieve an ex‐post efficient outcome, preserve the bonding role of debt and the absolute priority of claims. The author describes the existing procedures in the West with particular emphasis in the US and the UK and point out some of their flaws. He presents the Aghion–Hart–Moore (AHM) bankruptcy procedure, in which debt claims are converted into equity (respecting absolute priority) and the decision about whether to liquidate or reorganize is then put to vote by the new shareholders. It is argued that AHM combines desirable features of existing procedures and at the same time overcomes some of the major shortcomings of these procedures.

Keywords: absolute priority; bankruptcy; ex‐post efficiency; liquidation; reorganization; rights allocation; UK; USA

Chapter.  12000 words.  Illustrated.

Subjects: Financial Markets

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