Essential Corporate Bankruptcy Law

This article begins from a simple observation: Chapter 11 of the United States Bankruptcy Code is the global standard for corporate restructuring, but at the same time it is a far more complex procedure than most jurisdictions seem to require. This observation begs the question what parts of a bankruptcy system are ‘essential’. We argue that two elements are essential because they cannot be achieved by contracting alone: asset stabilisation and asset separation. Stabilisation ensures that the firm’s options are maintained. Asset separation ensures that the assets underlying these options can be separated from liabilities that are attached to them by law or contract. Both these elements drive much of the rules that are necessary to resolve distress but also show that parts of Chapter 11 are ‘unessential’ – for example, rules regarding reorganisation plans. Our goal is not to doubt the ‘richness and elasticity’ of corporate bankruptcy, particularly in the United States, but to find the essential elements. Beyond asset stabilisation and asset separation, features of the system are a matter of policy and politics. Understanding this helps in structuring insolvency systems and shows that Chapter 11 need not be the standard against which all other laws are measured.


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Despite two decades of corporate scholarship, and countless overheated debates on the merits of chapter 11, 13 neither of these two aspects of corporate bankruptcy have been the focus of commentary or analysis to date. 14

II. Financial Distress and Firms
Firms encounter financial distress for myriad reasons. One firm's business model might be fatally flawed: it has an interesting idea, but can never make money pursuing it. Another firm might have assets that are out of scale with its business, such as the airline that has more planes than it needs to serve its customers. And yet another firm might be quite viable but for the debt it acquired in a leveraged buyout. Often which type of debtor a particular firm is will not be immediately apparent at the point of distress.
The firm itself is a package of assets -broadly defined to include employees and other factors that contribute to firm value. 15 The literature regarding particular firm structures and their governance is well developed, but not particularly vital to our discussion. 16 Instead, we focus on the general notion that a firm is comprised of an isolated group of assets that are subject to a variety of claims.
These claims, and the formal and informal power that the claimants possess with regard to the firm, mean that a distressed firm is particularly likely to be the subject of competing impulses regarding future courses of action. 17 Outside of financial distress, the resolution of these competing demands is relatively straightforward. As a matter of formal law, firms typically have a defined governance body that coordinates action. 18 In the case of a corporation, this is the board, and historically the most junior claimants elect the firm's board, at least with regard to for-profit firms. 19 In times of financial distress the governance mechanism remains in place, but the membership might change and the claimant with the ability to control governance becomes a point of contention. 20 Corporate bankruptcy provides a mechanism for resolving these competing claims, and it does so by allowing asset stabilization and asset separation. Stabilization ensures that the firm's operational options are maintained. Asset separation ensures that the assets underlying these options can be separated from liabilities that by law or contract are attached to them.
Both these functions are to be seen within the realm of organizational law. And in our view corporate bankruptcy is part and parcel of organizational law. 21 Organizational law provides the format in which the economic activities of firms are set. There are many aims of organizational law -one of them is to protect the specific pool of assets against claims by creditors of the owners (affirmative asset partitioning) and another is to delineate that pool by prohibiting creditors of the firm to grab assets of the owners (defensive asset partitioning). 22 The first form keeps the assets together. It is the legal acknowledgment of the main insight of  78 (1989). 18 Del. Gen. Corp. Law. §141(a) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors...."). 19  It is also the main and most important reason why corporate bankruptcy is different from consumer bankruptcy law. 24 In a consumer bankruptcy, keeping assets together is not as important as the income-generating asset -the indebted consumer, who is also an employee or an entrepreneur -cannot be stripped from his abilities. 25 In a corporate bankruptcy, firms can easily be stripped of their assets, in the process destroying any existing synergies.
To be sure, firms err in bringing assets together; they get too big, too small, too diversified, and it is competition that gets these firms back in line, or ultimately leads them to bankruptcy. 26 Corporate bankruptcy law adds to affirmative asset partitioning the protection of the integrity of the asset pool itself. Given the conscious decision of the firm's management to bring this particular constellation of assets together, negating that decision upon financial distress would destroy any asset synergies. This is the function of asset stabilization in bankruptcy law. It should be noted that it is superfluous outside bankruptcy. It is the board of directors who decide upon a specific collection of assets and it this same board who decides to keep it this way or alter it. 27 Such a protective function is thus not needed in general organizational law. 28 6 Once in distress, however, the board no longer has sole decision making authority over the assets, as creditors' rights are triggered by the initiation of a bankruptcy procedure or some other indicator of distress. 29 These rights can lead to the break-up of the asset pool. This might happen in two ways. First, certain creditors may, by contract, have a claim that enables them to withdraw and sell specific assets out of the pool to satisfy their claims, without any obligation to take synergistic losses into account. 30 Second, creditors may try to better their position by grabbing assets out of the pool, as permitted by debt collection law. 31 Both lead to a destruction of the pool of assets, hence the need for asset stabilization in bankruptcy. 32 The second form of asset partitioning, defensive asset partitioning, keeps other pools of assets together: creditors of the firm are not allowed to destroy pools of assets that belong to the owners of the firm.
The asset separation function of bankruptcy law works in a similar vein, only it focuses on the assets in the firm's asset pool. Where defensive asset partitioning separates assets of owners from the firm, bankruptcy law's asset separation separates the firm's assets from claims of creditors on those assets. This separation differs from asset stabilization in that the assets are not protected via the delaying of creditor claims on specific assets, but rather separation allows the assets to be sold without any claim of any creditor on those assets attached.
In this sense bankruptcy law transforms a claim on a particular asset into a tort-like claim for monetary compensation equal to the value of the asset. The main value enhancing effect of this separation is that it makes the sale of assets easier to effectuate, thus minimizing value destruction during financial distress. 33 Prospective buyers do not need to inquire into the nature of the attaching creditor claims and are free to do whatever they think is best with the asset. This provides a setting in which prospective buyers can bid their private full value of the asset, without the need to value the obligations attached to it, maximizing the returns to the estate. 29 30 See U.C.C. § 9-503. 31 See U.C.C. § 9-501. 32 This shows that it is not only a common pool problem that is the foundation for bankruptcy law, as is assumed in the creditors' bargain theory of bankruptcy. See Baird and Jackson supra note 14. 33  Again, outside bankruptcy a sale of assets is the sole province of the board of directors, although contractual obligations imposed by the lender may limit this discretion. In this contractual setting, the decision to sell such an asset implies that a bilateral agreement has been reached between board of directors and the creditors. 34 Consent can be assumed to have a price, and produce incentives for holdout strategies.
With the initiation of bankruptcy, asset separation enables the bankruptcy controller to choose that deal that benefits the estate the most, instead of relegating that decision to a particular creditor. In most cases such a creditor will lack the knowledge or the incentive to find out what particular sets of assets are best packaged and sold together.
Asset stabilization and asset separation are both needed to operate a bankruptcy system. Stabilization without separation and vice versa leads to inefficient results.
Without separation, stabilization alone would make the asset sale inefficient. The bankruptcy controller would not be able to sell the assets in the optimal package. Creditors would try to extract privileges or rents to remove liens or attachments to specific assets, effectively prolonging the procedure, diminishing assets values, and lowering returns to the estate. In this bargaining process, the value difference between piecemeal liquidation and going concern asset sale would be subject to rent seeking by each creditor. Any deal done by the bankruptcy controller with a specific creditor would yield the next creditor a higher hold out value.
Without stabilization, separation alone would lead to an inefficient deployment of assets. The bankruptcy controller would not be able to keep assets together or in operation, thus making it more difficult to sell assets at a going concern premium. He will have to revert to a piecemeal liquidation of the estate, or at the very least a rushed sale of the estate. 35 Without stabilization, asset separation can then add only little value to the estate.
Both asset stabilization and separation are necessary additions to organizational law. Where organizational law protects pools of assets from interference of creditors outside a specific legal form, bankruptcy law protects assets within pools of assets within a specific legal form, but it does so only in bankruptcy as outside bankruptcy it is the board of directors that is responsible for the protection of the assets. Even more important, these two functions are the necessary and sufficient ingredients for a bankruptcy law system to operate efficiently. The two are essential elements of bankruptcy law. 34

III. Stability and Separation by Contract?
In this section we show why it would be essentially impossible to construct the two essential elements of bankruptcy law with contracts. As we show, while asset stabilization and separation could be constructed voluntarily under highly stylized conditions, under anything approaching real world conditions the costs of doing so would be prohibitive and the likelihood of doing so would be doubtful.
The literature on incomplete contracting identifies three elements that yield a noncontractable situation: unobservability, unverifiability, and unenforceability. The elements are not necessarily cumulative. 36 Under this literature, only if it is impossible or very costly to use a contractual solution is it absolutely necessary to invoke bankruptcy law. 37 In general, any contractual solution to financial distress will always fall down when addressing involuntary creditors. 38 And while the typical response is to assume such creditors should receive some sort of priority, such a solution ignores important ways in which priority of payment can be defeated. 39 Even if we focus solely on contractual creditors, to generate asset stabilization by contract all creditors would need to waive their individual contractual rights to specific assets in order to keep the assets together. Creditors would so contract if a series of unrealistic assumptions hold, namely • All creditors believe that the debtor's assets are worth more as a whole • All creditors agree on the value of the assets • All creditors believe they will recover more by collective action 36 See generally Oliver Hart, Firms, Contracts and Financial Structure, Clarendon Press, Oxford (1995). We deem these factors sufficiently malleable to cover practical concerns not originally addressed by the literature. If all three conditions hold, no creditor will disrupt the collective proceeding and a contractual solution will exist.
It is here that the problems of a contractual solution manifest themselves. 40 Of course, it is improbable that different types of creditors will have homogeneous expectations concerning the value of the firm. 41 Even if they did, we should expect that any such moment of agreement would be fleeting.
After all, if the market for the debtor's claims is even somewhat liquid, such agreement cannot long persist if the market is to keep functioning. But even when claims are not traded, it is very unlikely that the expectations will stay homogeneous as the prospects of the firm change. With that, agreement will break down as well.
Moreover, equal access to information would be vital to such a contract. 42 It is not hard to envisage the situation in which a creditor calls upon a court to argue that misrepresentation or changes in the firm's outlook voids the contract. 43 Whether such a claim is actually true or inspired by opportunistic motives is not important. Such statements are unverifiable in court as the "true" value of the firm is unobservable. 44 Furthermore, writing a clause in the contract that any creditor breaking the contract needs to compensate all others for the value lost is problematic. In such situations, the "true" value of the firm is a counterfactual, and thus unobservable, unverifiable and unenforceable. Given these ex post problems, creditors will not be able to construct a contract ex ante that incorporates such a shared belief concerning the value of the firm.
Even if such a contract would be feasible, creditors would have to monitor the debtor-firm and provide for monitoring of their fellow creditors. The debtor-firm, or more exactly its controlling authority, needs to make the correct economic decisions; while creditors need to be monitored so that no one creditor breaks the 40  contract by extracting assets from the firm. Although the contract may specify the decisions the controller is empowered to make, it is impossible to specify all kinds of important operating decisions that need to be made by the controller.
The controller needs implicit or residual control rights in order to run the firm. But creditors will be skeptical of this power. Decisions not provided for in contract need to be communicated to creditors together with the details that show that the decision was the correct one. Apart from the inordinate amount of information that would need to be shared, the effect this information would have on expectations concerning firm value is not predictable. It could provide room for any creditor to demand renegotiation or otherwise void the contract.
Monitoring also implies a sharing of information among creditors concerning firm decisions and creditor decisions concerning contract compliance. 45 With an increase in the number of creditors and the types of creditor contracts involved, this information sharing becomes increasingly costly. Hence, the apparent need for representation within the firm. However, representation adds a layer to the decision making structure among creditors, gives rise to additional information asymmetries, increasing the possibility of opportunistic behavior, effectively undermining the benefits of contracting. 46 The final item bulleted above -that each creditor knows she will receive no less than what she would receive when acting on her own -mimics the actual chapter 11 rule known as the "best interest of the creditors" test. 47 But it is difficult to enforce this rule in a contractual setting.
It is built upon a counterfactual observation, the going concern value or the liquidation value of the specific asset. 48 Although one can estimate this value, these estimates are imprecise and vulnerable to manipulation. And these values fluctuate over time due to wear and tear, technological changes and the economic cycle.
In short, asset stabilization is at a minimum costly, or even prohibitively costly, to organize by contract. If asset stabilization is essential to solving corporate financial distress, as we argue, it then has to be done by statutory law. Although these 45 Cf. Jonathan C. Lipson, Governance in the Breach: Controlling Creditor Opportunism, 84 S. CAL. L. REV. 1035, 1093 (2011). 46 One solution to this problem is to convert all creditor claims to equity. But one should note that this requires a certain amount of mandatory regulation in order to solve priority issues among creditors and asset valuation problems. At this point the inquiry is to find out reasons why contracts cannot solve this problem, not which type of regulation can solve that. 47 11 U.S.C. § 1129(a)(7). 48  arguments show that it is costly to organize by contract, they do not necessarily show that statutory law is the solution.
Actually, statutory law runs into the same problems as contracts do, but its advantage is that it forces an imperfect solution on participants. That is, participants loose their option to exit the arrangement through litigation, since the arrangement is mandatory rather than voluntary. 49 Similarly, in order to replicate asset separation by contract, creditors need to agree ex ante to release all rights in the debtor's assets upon sale. This release would need to include not only the obvious -liens -but also claims like fraudulent transfer actions and successor liability rights.
The controller needs to have the power to decide what, when and at what price to sell. For that he needs to have the ability to sell those assets free of any creditor claims. If not, he would be restricted in performing his duties and miss potential value maximizing offers.
Such freedom of action, though, generates an important agency problem the moment the controller enters the stage. 50 The controller may decide to sell all valuable assets at artificial low prices to a company owned or controlled by him or any other preferred party. These sorts of fraudulent transactions would seriously undermine the contractual agreement creditors need to reach among themselves.
To prevent such a fraud, the controller needs to be restricted to asset sales that provide at least the present value of the claims against the assets, while assuring creditors that they could do no better when acting on their own. 51 Such an assurance prevents an opportunistic sale of assets by the controller.
He needs to present a better deal than anyone else might present. This requires information concerning the value and price of the assets to be sold and whether the offer is the best one on the table and that no creditor has a better alternative. As with asset stabilization, this information needs to be shared and creditors need to form homogeneous perceptions in order to agree with the deal. Although such a contract may prevent an opportunistic sale by the controller, it opens up the possibility of opportunistic hold up by creditors. This is especially so when a creditor might indeed fetch a higher price for a particular asset but the set of assets together fetches an even higher price. Obviously, a bargain might be struck by transferring part of this premium to that specific creditor. This transfer is ex post efficient, but it generates an incentive for other creditors to hold out as well.
The main cause for this problem has been discussed above with regard to asset stabilization: it presupposes that the asset values can be established and agreed upon among the creditors. In short, asset separation is at best very costly to construct by contract.
One further, global element to consider in discussing the contractual solution is the cost of drafting the contract. The discussion above points out that this drafting will be a complex assignment, yielding a document that might be either wafer thinproviding ample residual decision making power for the controller -or massively large -documenting all possible contingencies, information sharing responsibilities and penalties for voiding it.
The wafer thin version implies a very robust ex post governance mechanism to settle diverging expectations, handling opportunistic actions and providing information. The vastly large one implies a very robust monitoring system to make sure everybody is living up to the contractual obligations. But other costs come up as well with regard to a fully specified agreement.
First, someone must do the drafting. The most obvious candidate is the board. 53 However, from the creditors' perspective, the board is not an impartial agent in the drafting process at the beginning of the contractual relation, and certainly not at the moment of financial distress. The board will have its own agenda, motives and incentives, which might be at least partly antagonistic to at least certain types of creditors.
Furthermore, this contract must be accepted by all new creditors that interact with the firm. These drafting cost have to be added to the total cost of the contractual solution.
In short, the contractual alternative exists largely as a thought experiment. For any real firm, with a real capital structure, the impossibility of achieving asset stabilization and asset separation by contract seem self-evident.

IV. Essential Elements of Corporate Bankruptcy Law
Having thus demonstrated that asset stabilization and asset separation must be established by statute, we next turn to the aspects of bankruptcy law that support these two essential elements. There are many features of chapter 11 and other corporate bankruptcy systems that are prominent, even convenient. But we argue that they are not all essential to the basic functioning of corporate bankruptcy law.
We first consider the elements that are necessary to achieve asset stabilization, before turning to asset separation.

a. Asset Stabilization
Most obviously, to achieve asset stabilization individual creditor action must be thwarted. 54 This means that a collective procedure superseding and subsuming individual actions is essential. In addition, the statute must guarantee creditors that no one gets better treatment than contractually bargained for.
The collective process most often supplants individual creditor rights by imposing a stay. For example, in the United States the filing of a bankruptcy petition creates a bankruptcy estate, from which collective recoveries are paid. 55 The viability of that estate is then preserved by the automatic stay imposed by statute on all creditors within the jurisdiction of the bankruptcy court. 56 14 While it is sometimes suggested that a creditor with a claim on all the debtor's assets will have the proper incentives to consider their value as a whole, that only holds for creditors with claims at the edge of the debtor's going concern value. If we instead assume that senior creditors routinely over-collateralize their position, then they have no incentive to consider possible externalities that their collection actions will create. Rather, the creditor will prefer the collection method that minimizes cost while still resulting in full recovery. This may or may not impair overall efficiency. 60 Even if a creditor would refrain from such a collection action, an additional inefficiency here is that such a creditor might provide additional financing to companies more easily as it is more than fully secured compared to a situation in which it does not hold such a position. The creditor then eats into the surplus in collateral value that is available to other creditors. This leads to a less timely petition for bankruptcy protection. 61 And if bankruptcy law is essential for stabilizing asset values doing so sooner is likely to result in an efficiency gain.
Moreover, even if the creditor is under-collateralized, but has a claim on a vital asset, an exception to the collective process allows the creditor to extract rents from other, more junior creditors. The exception gives the preferred creditor the ability to threaten the recoveries of other, junior creditors and thus demand part of their recovery. It seems doubtful as a matter of policy that extortion of this sort should be facilitated by insolvency law.
Asset stability is also promoted by discouraging runs on the debtor's assets. 62 Thus, many reorganization systems provide that claims paid in the days before formal proceedings are commenced will be treated as part of the proceedings. 63 This prevents claimants' efforts to effectuate a socially inefficient, but personally efficient collection of the debtor's assets.
But stopping individual action is not sufficient to achieve asset stabilization. 60 ECON. 429 (2006), provide empirical evidence of such over collateralization and financing outcomes in a liquidation based bankruptcy system. The other side of the medal is that financing is less easy when a system is geared towards reorganization. 62 Vern Countryman, The Concept of A Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713, 748 (1985). 63 See 11 U.S.C. § 547 (providing that debtors may recover preferential transfers).
Asset stability also requires prohibitions on contractual efforts to undermine the collective process. 64 Contractual penalties, insolvency termination rights, or springing creditor protections that activate only upon commencement of the insolvency process have the same effect as creditor efforts to extract individual assets from the debtor.
Liquidity is also an inevitable prerequisite to maintaining asset values in most firms. 65 Employees who continue working for the firm must receive their pay packets, vendors' invoices must be paid, and assets must be maintained.
Some of the debtor's liquidity needs can be met by foregoing interest payments to bondholders, but suppliers not operating under long-term contracts will make it clear that future deliveries will require cash on delivery, or other forms of security, if the delivery comes at all. That is, the debtor's increasing need for cash often swamps the benefit of suspending debt payments.
Thus, to achieve asset stability the insolvency system must provide for the liquidity needs of the debtor firm. 66 At minimum, this element of the insolvency system must provide that post-insolvency claims are entitled to priority over pre-insolvency claims. Without this basic protection, new money would benefit old creditors, making such new injections of cash extremely unlikely. 67 Thus, the system must provide both temporal priority and priority as to rights in specific debtor assets.
Providing priority in the debtor's asset necessarily unleashes several other questions that turn on the basic question of "how far should this go?" For example, in the United States it is impermissible to provide priority rights in a piece of collateral if doing so will make a prior creditor uncollateralized. 68 It is thought that such treatment is required by the Fifth Amendment to the Constitution, which protects property from being taken by the government without just compensation.
Other jurisdictions may prioritize creditors in different ways. In a general sense, the key question is one of balancing the benefits of any subordination ex post against the likely ex ante effects. Conversely, and probably more commonly, many jurisdictions presently provide post-bankruptcy funding with a payment priority, but no security interest in the debtor's assets.
Stabilization also requires recognition of the soft power that many claimants have with regard to debtors. 69 Employees may refuse to work if their past claims are not addressed. Trade creditors may legally withhold future inputs if they have no contractual obligation to make future deliveries. 70 And creditors in foreign jurisdictions might ignore prohibitions on individual creditor action. The liquidity that is used to stabilize the business may also be needed to addresses these issues if doing so will preserve the overall value of the estate. 71 Addressing liquidity needs, especially when considered in light of the soft power that creditors might possess, will often lead to changes in the normal liquidation distribution scheme. For example, while the United States nominally follows the "absolute priority rule" in both chapter 7 and 11, in chapter 11 the decision to assume contracts or pay providers of vital inputs will result in full payment of those claimants despite what they might have been entitled to in a liquidation. This suggests a point that we return to in our discussion of asset separation below: namely, that the distribution rules for reorganization might necessarily deviate from those of liquidation.
The reorganization system might reference the broader set of distribution rules, with possible deviations specified as needed to achieve the specific goals of reorganization. For example, in the United States if a debtor wants to assume a currently beneficial contract, the debtor must cure any past defaults. This has the effect of granting the counterparty better treatment than other unsecured claimants, since its claims get paid in full. 72 In essence, if the debtor wishes to treat the contract as an asset, rather than a claim for damages, it must fully perform on the contract. 73 In liquidation such a rule represents a policy judgment that the gains from the contract should be shared among all creditors, rather than conferring a windfall on the counterparty that would otherwise obtain a right to terminate. 74 Whether this is a good or bad policy is not the focus of this article. 75 Rather, in the specific context of reorganization, such a rule simply eliminates the exercise of holdout power by the counterparty and thus furthers the cause of asset stabilization. The counterparty is given the full benefit of performance on the contract, and the debtor is able to maintain its asset pool's integrity.
Such a rule deviates from the normal liquidation priorities, where all unsecured creditors normally receive equal payment. 76 But doing so is necessary to recognize the going concern value of the debtor in reorganization. And counterparties know that such treatment is likely to occur, and are thus able to price their reduced holdup rights ex ante. 77 In short, clear distribution rules, whatever they may be, are all that is required. 78 This discussion also highlights the basic point that some parties have holdup power in a reorganization, and often the reorganization process will need to simply acknowledge and move past that power to obtain true asset stabilization.
More generally, to avoid the agency problems inherent in such a system of priority financing, an independent monitor or trustee 79 must oversee the process. 80 Such a monitor insures that the new financing is not a disguised preference for specific claimants or management. 81 This role can either take the form of a direct examination of the value of the debtor's assets, or of simply preserving the ability of parties to challenge the valuation issue at some point in the future. 82 The monitor can also resolve disputes among new and incumbent lenders, particularly with regard to any rules that limit the priority of new financing.
Apart from these limited functions, a monitor is also the economical solution to the agency problems discussed above. All participants are confronted with skewed incentives and -when at the helm -with the possibility to appropriate part of firm value. A monitor mitigates this problem; although imperfectly as incentives also undermine his impartiality.
The monitor might be contracted for by creditors, but his job description should be provided for in statute, including (limits to) liability. This ensures that a monitor works for the benefit of all, but more importantly not for a specific creditor class. It also implies that the incentive scheme for a monitor should not be high powered as this would skew his decision-making. Limits to liability are needed in order to ensure an economically correct risk attitude and to elicit experts to work as monitors. The selection of such a monitor can be market based, leaning on reputation effects, or via courts.
The monitor might take the form of a committee with duties to a larger class of claimants, represented thereby. 83 In such a case, the law likely must provide for the payment of the committee's expenses from either the debtor or the class. Otherwise the committee presents an obvious free rider problem.
But instead of a committee, the monitor might be some other independent official in the case. This avoids the common problem of conflicts among classes of claimants, a problem that many have argued has become more common with the advent of new, more complex financial instruments and trading strategies. 84 In jurisdictions with court based insolvency systems, the monitor might themselves be subject to court oversight. The general challenge with such a structure is to avoid the creation of new agency problems that undermine the benefits of monitor. If the monitor is too "pure" -that is, entirely disinterested in the case -their primary motivations may tend toward their own compensation, at the expense of an efficient reorganization process.

b. Asset Separation
To achieve asset separation, a reorganization system needs a mechanism that cleanly detaches a firm's liabilities, in all forms, from the firm's assets. 85 This could be achieved by a discharge provision. 86 In the sense that upon fulfilling certain conditions all debt is wiped out and the debtor is allowed to resume operations unencumbered. 87 But a discharge provision is not vital, so long as the system provides that the new owner of the assets, which may be the post-bankruptcy firm, has clean title. 88 This simply requires a legal mechanism for leaving all of the pre-distress debts behind, converting any obligation that would otherwise run with the assets into a tort-like claim for money damages. 89 In theory, asset separation can be achieved outside of bankruptcy. For example, under Delaware corporate law the debtor-firm could sell some part of its assets. 90 The normal American rule is that an asset purchaser takes free from the seller's liabilities -the seller's creditors have their remedy against the sale proceeds. 91 But there are several important exceptions to this basic rule. There are myriad forms of "successor liability" that serve to reverse the presumption. 92 And an asset sale might be challenged under fraudulent transfer law, particularly if the buyer fails to pay "reasonably equivalent value." 93 A corporate bankruptcy system replaces these rights, and other similar challenges to distressed asset sales, with a collective proceeding that serves to safeguard the same basic interests. Thus, while the process hands the buyer much cleaner title, it must also ensure that doing so does not result in expropriation.
This suggests that separation also requires distribution rules. Payment of the claims against the debtor should proceed by clearly defined rules, but these rules need not be the absolute priority rule that so dominates Anglo-American discussions of 20 insolvency. 94 Instead, it is simply important that the rules are known ex ante, whatever they may be. 95 Asset separation necessarily follows asset stabilization, and the choices made during the stabilization phase influence recoveries upon separation. As noted in the discussion of stabilization, as part of that initial process the debtor (or the monitor/trustee) will often pay creditors outside of the normal distribution rules. While the debtor's discretion in this regard is checked by an oversight mechanism.
That is, the asset separation process must be conducted in a manner that will result in the highest possible proceeds. Stabilization must occur to preserve asset value, not holdup power. 96 A neutral party -be it a judge or a trustee 97 -is needed to insure this happens. 98 Nonetheless, because the debtor's discretion involves a good deal of business judgment -something courts and other monitors are often ill-equipped to exercisethis oversight is rightly apt to be "light." And in most instances oversight will ultimately rely on stakeholders to surface issues of concern, since the ultimate distribution to stakeholders will be influenced by decisions the debtor makes while stabilizing its assets.
This then highlights the basic notion that notice, participation rights and oversight are also key attributes that must accompany any asset separation tool.
In general, the mechanics of any particular jurisdiction's asset separation instrument is apt to be highly dependent on the local property law. In the United States property law is highly fractured: each state has its own law, while real and personal property are distinct areas of the law, and in many cases motor vehicles provide yet another source of relevant law.
An asset sale of a large business in the United States thus involves a high degree of transaction cost. Not surprisingly, the U.S. corporate bankruptcy system seeks to overcome these costs by consolidating power over the asset transfer in a single bankruptcy judge. In jurisdictions with more streamlined property law, the incremental gains from adoption of specific U.S. procedures are apt to be minimal.
The key goal with asset separation is to provide mechanisms to overcome barriers to asset transfers and attempts by individual creditors to appropriate value through holdups. Discharges and other provisions that "cleanse" assets are obvious pieces of asset separation.
Other provisions, like those that overturn contractual prohibitions on asset transfer also have a role to play. 99 After all, such a prohibition is often just a means for demanding a side payment in exchange for consent to the transaction. On an individual basis, such side payments represent an allocation of gains amongst two parties. When aggregated across an entire firm, however, such payments represent friction costs that destroy going concern value.

V. The Nonessential Elements of Corporate Bankruptcy
Comparison of the foregoing with current chapter 11, or any other similar corporate reorganization system, will quickly reveal that much of the present law is not essential. 100 For example, chapter 11 contains a set of well-developed rules regarding reorganization plans. Statutory provisions cover the solicitation of votes on such plans, 101 the voting and classification rules, 102 and the rule for judicial confirmation of plans. 103 But is it really vital to have reorganization plans?

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The sale of the debtor's good assets to a new legal entity can preserve the going concern value of the assets. At that point, distribution of the sale proceeds could just as easily occur under a liquidation structure as under a plan. 104 Arguably the general distribution rules are not a necessary part of the reorganization system, but rather a necessary part of the larger debtor-creditor system. All debtors and creditors need to know where they stand in any sort of collection action. 105 Note also that asset separation and asset stability do not necessarily require anything like the American "debtor in possession" system -which leaves incumbent management in control. 106 Certainly existing management might be better able to achieve these ends, but that is a question of degree and subject to much debate, and our goal is to delineate the essential. 107 Although rules for a reorganization plan are thus not essential to bankruptcy law, if for whatever reason participants want one, the essential element is the upholding of the previously announced distribution rules. 108 Upholding the rules typically complicates the process as it requires valuation of the firm and its claims. 109 The fact that this is needed however does not mean that it is needed to specify rules for this. The alternative -selling the assets -provides the setting against which any proposal is evaluated. 110 Rules may reduce haggling costs via a reduction of potential conflicts, but the experience in the United States show that any delineation or adjustment therein creates room for redistributive actions and even costly lobbying of Congress. 111 It does not follow therefore that such rules are efficiency enhancing, let alone essential.
Although economic cycles might diminish or even eliminate first and second best buyers for distressed assets, 112 it does not mean that rules for reorganization are essential. To our minds, asset stabilization and separation, however created, are the more important elements. The argument that the reorganization option is the solution to a lack of possibilities to sell is not necessarily the case. Even in a hypothetical sale the firm needs liquidity, which might not be forthcoming in a downturn. Selling to a second best buyer is then a better option. Furthermore, asset stabilization does not require an immediate sale; it might be postponed, thus waiting for better options. Indefinite postponing creates adverse competitive effects, but will not happen easily as it will be difficult to secure financing for a new long term strategy in bankruptcy. 113 Plans are one possible collective solution to financial distress, but with sufficient financing and rules to govern holdout problems, sales of the debtors would seem to work just as well.
Creditors committees were once considered vital to reorganization, since small creditors were too often loath to incur the costs of participation. 114 There is much wisdom in the basic idea of including creditors in the reorganization, but the advent of modern finance has also called into question the notion that creditors incentives are easily understood. 115 As such, the ability of a committee to represent all unsecured creditors might be doubted, and we therefore do not deem such an instrument essential. 116 Similarly, we doubt whether the various statutory priorities, 117 caps on claims, 118 rules for dealing with special contracts, 119 special collateral, 120 and special debtors are essential. 121 Politically inevitable perhaps, but not essential.

VI. Conclusion
Our goal is not to doubt the "richness and elasticity" of corporate bankruptcy, particularly in the United States. 122 There might be myriad policy reasons why any particular bankruptcy system might include particular features.
Our goal is instead to identify the minimum. We argue that there is a core of corporate bankruptcy -asset separation and asset stability -that parties cannot achieve alone, no matter how robust their contract law.
As such, it is this core that must be the basis for any sensible corporate insolvency system. Beyond that, features of the system are a matter of policy, and politics.
Understanding where the core is, however, helps to focus policy makers' attention on the choices involved in structuring an insolvency system. And it moves away