The Rise of Bankruptcy Directors

The Rise of Bankruptcy Directors

Jared A. Ellias, Ehud Kamar, Kobi Kastiel

Series number :

Serial Number: 
593/2021

Date posted :

June 25 2021

Last revised :

June 25 2021
SSRN Share

Keywords

  • boards of directors • 
  • Chapter 11 • 
  • Bankruptcy • 
  • Corporate governance • 
  • conflicts of interest • 
  • Board Governance

In this Article, we use hand-collected data to shed light on a troubling innovation in bankruptcy practice. We show that distressed companies, especially those controlled by private-equity sponsors, often now prepare for a Chapter 11 filing by appointing bankruptcy experts to their boards of directors and giving them the board’s power to make key bankruptcy decisions.

These directors often seek to wrest control of self-dealing claims against shareholders from creditors. We refer to these directors as “bankruptcy directors” and conduct the first empirical study of their rise as key players in the world of corporate bankruptcy. While these directors claim to be neutral experts that act to maximize value for the benefit of creditors, we argue that they suffer from a structural bias because they are part of a small community of repeat private-equity sponsors and law firms. Securing future directorships may require pleasing this clientele at the expense of creditors. Consistent with this prediction, we find that unsecured creditors recover on average 21% less when the company appoints a bankruptcy director. While other explanations are possible, this finding at least shifts the burden of proof to those claiming that bankruptcy directors improve the governance of distressed companies. Our policy recommendation, however, does not require a resolution of this controversy. We propose that the court regard bankruptcy directors as independent only if all creditors support their appointment, making them accountable to all sides of bankruptcy disputes.

Authors

Real name:
Jared A. Ellias
Real name:
Kobi Kastiel