Examiners in US Chapter 11 bankruptcy procedures are usually appointed to conduct investigations. Recent reform proposals, such as the American Bankruptcy Institute (ABI) Reform Proposal, have advocated a more flexible understanding of examiners. Further, some bankruptcy courts have given examiners powers other than investigation. For instance, examiners have been successfully used as mediators, coordinators, and experts on certain (foreign) legal questions, or to bring derivative suits on behalf of the debtor.

Given these potentially broader uses for examiners, it is somewhat surprising that not much attention has been paid to the question of which responsibilities and authority examiners should be given. In my paper, I analyze the situation in the US and offer comparative legal insights from Germany. The German counterpart of an examiner – termed a Sachwalter and best translated as a ‘supervisor’ – is especially interesting because Germany used the US Chapter 11 as a model for the fundamental reform of the German Insolvency Code in 1998. Having its origins as a trustee system, the German Insolvency Code now also allows for a self-administration procedure that is very similar to the US debtor-in-possession model. The German self-administration procedure differs, however, when it comes to the role of the German supervisor in comparison to the US examiner. The supervisor is a neutral person who is appointed in each self-administration procedure.[1] She has extensive powers and mainly deals with legal and procedural tasks during the insolvency proceeding whereas the management is provided with the opportunity to focus on the business aspects of the insolvency case. This clear role division in Germany promotes cost-efficiency as the examiner has, contrary to the debtor and its management, relevant expertise and experience. Most importantly, broader responsibilities and powers reduce conflicts of interest and corporate governance problems.

Although I do not conclude from the comparative analysis that massive changes to the US Bankruptcy Code are necessary, I argue that there is no justification for the current reluctance to use examiners more broadly as a means of overcoming problems caused by the debtor-in-possession model, eg conflicts of interest, and violations of both the law and the absolute priority rule. Bankruptcy courts should use examiners in a more flexible way and understand them as actors who can improve the procedure and intervene when necessary.

This approach does not dilute the debtor-in-possession model; rather, it preserves it. Many of the functions could otherwise only be fulfilled by a bankruptcy trustee. The appointment of a trustee, however, would also replace the management and should therefore be a last resort. By contrast, the appointment of an examiner can address numerous issues while also leaving the management in place to organize the turn-around of the company, thereby preserving the characteristics of Chapter 11.

One practically important example of empowerment is the authority to bring derivative suits on behalf of the debtor. Considering the advantages of the role assignment and the attenuation of conflicts of interest, good arguments can be made in favor of an examiner’s right to sue. Often, management would be reluctant to sue. This is obvious in cases where management itself may be liable. But also in cases of fraudulent conveyances and voidable transfers, management might not be willing to sue the recipient since the motivation to favor this party over others might persist, eg, because the recipients are debtor-in-possession lenders or key suppliers. In such cases, the only reliable way to ensure the retrieval of the payments or other benefits is the appointment of a trustee. This decision, however, affects not only the legal issues but also the management of the debtor. With such a move, the management will be entirely stripped of power despite it perhaps being preferable to have the old management running the company. It does not seem desirable to leave the courts no choice in this kind of situation. The obvious alternative is to appoint an examiner and give her the right to sue (eg, against the main creditor as recipient of preference transfers) while at the same time keeping the debtor in possession.

Stefan Korch is a Senior Research Fellow at Max Planck Institute for Comparative and International Private Law, Hamburg, Germany.

 

[1] See Stefan Korch, Wozu Sachwalter? – Eine funktionale und rechtsvergleichende Betrachtung, 2018 ZIP 109 (discussing the tasks of and the value added by German supervisors).