“Suppose that a bankruptcy judge has two options in a bankruptcy proceeding of a factory. First, the judge could reorganize the factory, resulting in a $1,000,000 payment to creditors and keeping the factory largely intact. Second, the judge could liquidate the factory, resulting in a $1,500,000 payment to creditors and the loss of 1,000 jobs as the factory is shuttered. What should the bankruptcy judge choose?”
With this deliberately provocative question Zachary Liscow rekindles the debate about the fundamental values of bankruptcy law in a recent article published in the Columbia Law Review (read here). The debate is far from new. A distinction is commonly made in this respect between “traditionalists” and “proceduralists”. According to the former, bankruptcy law should advance substantive (redistributive) goals. According to the latter, bankruptcy should maximize the return to creditors (read here and here).
Liscow advances a counter-cyclical approach of bankruptcy law, according to which more (less) weight should be placed on preserving employment during times of high (low) unemployment. This approach arrives at midpoint between “traditionalists” and “proceduralists”.
Finding the right balance between returns to creditors and other societal goals, is a permanent exercise for legislators and courts. The majority position in Europe today appears to be that bankruptcy law is not just about efficiency (read here).