Should bankruptcy be allowed to erase claims that may technically have arisen pre-bankruptcy but which a company’s creditors weren’t aware of at the time?
Our modern bankruptcy system plays a critical function in our economy, as it provides a mechanism for financially insolvent businesses with the opportunity to chart a new, sustainable path forward through the Chapter 11 process. Every day, businesses are given a second chance on life, and American jobs are preserved, when a bankruptcy court oversees an asset sale or makes way for a new owner to enter the picture.
The current procedure allows for a potential new owner to be fully aware of both the assets and liabilities it will be assuming. This knowledge is vital to an investor’s assessment of a company and our development of a financially and operationally sound path forward.
Without these clearly defined court-ordered assurances, purchasers could face significant unknown and never-ending liability for mistakes occurring during the previous ownership period. If a new owner was held liable for unquantifiable pre-bankruptcy claims, it would have a chilling effect on both the system and the market. Such a failure would spur significantly more liquidations and undermine the very assurances our bankruptcy process is intended to afford.
While the particulars of the GM case are still emerging, it is important to remember the old adage, “hard cases make bad law.” We must consider that the bankruptcy process plays an important role in the U.S. economy, as it functions to preserve capital, retain jobs and ensure there is a fair and predictable process for creditors to recover what they’re owed.
Marc Leder, co-chief executive officer of Sun Capital Partners Inc. of Boca Raton, Fla., has been engaged in leveraged buyouts, investment banking, and business operations for more than 25 years.
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