SBRA technical amendment = technical foul?

A great Arabic folk idiom describes an all-too-common occurrence: Literally, "he came to apply eye liner to her, but blinded her." [اجا يكحلها عماها  izha ikaHil-ha, ^cama-ha] In other words, someone attempted to improve a situation but ended up ruining it. I believe I've encountered an example in the "technical amendment" made by the CARES Act to the Small Business Reorganization Act of 2019.

As Bob pointed out almost exactly two years ago, the original SBRA definition of a "small business debtor" was designed to keep out large public companies and their subsidiaries, but the language was ... inelegant. The first of two subsections (laid out in Bob's post) excluded companies subject to reporting requirements under the Securities Exchange Act of 1934 (that is, a company with shares widely held by "the public," as defined by the SEC), while an immediately following exclusion applied to such a company that was an affiliate of a debtor (that is, another company already in bankruptcy). Well, whether you're an affiliate of a debtor or not, if you try to file under subchapter V, and you're subject to the '34 Act reporting requirements, you're excluded by the first subsection, so isn't this second provision redundant?

Yes, but ... in 2020, the CARES Act came to put eye liner on this section and blinded it. Rather than fixing this by saying what seems to have been the intention--that an affiliate of a public reporting company cannot file under subchapter V--instead, a "technical amendment" changed the final provision entirely by simply excluding an affiliate of an "issuer, as defined in section 3 of the Securities Exchange Act of 1934." [the same language was inserted in both sections 101(51D)(B)(iii) and 1182, so this change is not temporary]

The problem, it seems to me, is that the definition of "issuer" in the '34 Act includes far more than a big, public reporting company--it includes any company that issues so many as one share of stock (or other "security"). The '34 Act is generally about trading of public securities, but that's not the only thing it's about, and the definition of "issuer" in the '34 Act is simply reproduced from the '33 Act, with far broader application.

Personal Insolvency in Asia and Currency Comparison

While Shenzhen has gotten all the good press since its March launch of the first personal bankruptcy regime in Mainland China, a number of other Asian regimes have also been on the move. I recently examined the rapidly developing personal insolvency system in Singapore, and others have done great work on the unique processes in Japan and Korea. As an outsider, I struggle to capture the real feeling of life under these procedures. The challenge is expressed brilliantly by my favorite article on the difficulty of examining legal phenomena that are utterly foreign to the examiner, a paper that sought to answer the question "what was it like to try a rat?" This struggle is particularly acute in a new paper I've just posted on the fascinating evolution of Shenzhen's new law from its roots in a little-known 2008 consumer insolvency law in Taiwan. The Taiwan law is still in effect, of course (as amended in important respects), and the rocky experience of its first decade offers important lessons for personal insolvency policymakers in Asia and beyond. In both Taiwan and Shenzhen, a potential continuing challenge that intrigues me is among the most important and impactful in any such law--the measure of "necessary" household expenses to be budgeted to debtors for the purgatory period of three years (in Taiwan, it's six!) preceding a discharge. Both Taiwan and Shenzhen chose the social assistance minimum income; basically, the poverty level. Taiwan recently increased this by 20% after years of criticism of forcing bankrupt debtors into the extreme austerity of living within these tight budgets. Shenzhen has decided not to go beyond the poverty level, at least for now.

Expressing the strictures of these poverty levels in useful comparative terms is really difficult for me. Official exchange rates are quite misleading when the question is "what is it like to try to make do on X [local currency units] for three years in [X country]?" Purchasing power parity exchange rates likely get closer to the mark, but with China, I'm not even sure that approach captures the pain (or ease) that debtors in the "discharge examination period" must endure. The figures I'm wrestling with are 1950 yuan in Shenzhen and about 18,000 new Taiwan dollars (15,000 x 1.2) in Taipei (less in the outlying areas). I vaguely understand these to correspond to about US$465 and US$600, respectively, per month, but this just seems untenable to me. How could anyone survive on these amounts for 36 months in Shenzhen or 72 months in Taipei? Granted, both sets of figures are per person, so a debtor caring for parents and/or children might end up with several multiples of these figures per month, but even then, supporting a family of four on US$1860 per month for three years in a major city like Shenzhen still strikes me as so austere as to dissuade people from seeking relief. Am I just out of touch with the reality of modern financial struggles generally (I know some low-income Americans also strain to make ends meet on somewhat similar budgets), or am I not understanding something about life in big-city China, or are the figures just not reflecting the feeling of life within these limits? Any insight would be greatly appreciated.

Book Rec: Range (or Yet Another Paean to Learning from Failure)

With summer upon us, I thought others might be searching for good new reading, as I was when I took up a smart friend's longtime recommendation to read Range: Why Generalists Triumph in a Specialized World. So much good stuff in here. Perhaps contrary to the topic of the book, my brain is constantly in "insolvency policy" mode, so I was particularly interested in the many passages about famous people's meandering struggles to find their passion that catapulted them to success.

Among my favorites was a description of Nike co-founder Phil Knight's entrepreneurship philosophy: [155] "his main goal for his nascent shoe company was to fail fast enough that he could apply what he was learning to his next venture. He made one short-term pivot after another, applying the lessons as he went." This is exactly the advice offered to country after country hoping to develop more effective SME-friendly bankruptcy regimes ... as they unfortunately continue to stick to Old English draconian policies of imposing various restrictions and disabilities on post-bankruptcy entrepreneurs. Range offers yet another extended analysis of why this mindset is so persistent and so counterproductive. We need to let people fail, learn from whatever caused that failure (either mistakes or general economic volatility ... or COVID) and get back on their feet quickly to move on to other ventures.

Human Rights Watch on Imprisonment for Debt

What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years--with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

Book Recommendation: Caesars Palace Coup

A fun new book applies a revealing Law & Order analysis to the multi-billion-dollar, knock-down-drag-out reorganization of Caesar's Palace. In The Caesars Palace Coup, Financial Times editor, Sujeet Indap, and Fitch news team leader, Max Frumes, open with a detailed examination of the personalities and transactions that preceded the Caesars bankruptcy case, leading to the second (and, for me, more interesting) part of the book, tracking step-by-step the harrowing negotiations, court proceedings, and examiner report that led to the ultimate reorganization.

There is so much to like in this book. Its primary strength is its Law & Order backstory, peeling back the onion of every major player, revealing how they got to where they were in their careers in big business management, high finance, or law, and revealing their thoughts and motivations as the deals and legal maneuvers played out. Four years of painstaking personal interviews have paid off handsomely in this fascinating account of the inner workings of big money and big law reorganization practice. On a personal note, I was treated to a bit of nostalgia, as the book opens with and later features Jim Millstein, an absolute gem of a person who taught me about EBITDA when my path fortunately crossed with his at Cleary Gottlieb in New York City in the late 1990s. It also features the Chicago bankruptcy court in my backyard, which seldom hosts such mega cases as Caesars', and the story in the second half of this book reveals part of the reason why. Cameo appearances include some of my favorite academics, such as Nancy Rapoport, as fee examiner, and Slipster, Adam Levitin, as defender of the Trust Indenture Act. On that latter point, the book alludes to (but does not particularly carefully explain) the key role of the Marblegate rulings on the TIA, which is described in a bit more depth in a vintage Credit Slips post. Again, the book's most valuable contribution is a behind-the-scenes look at the motivations and machinations behind a salient instance of collateral stripping, adding to the literature on this (disturbing) trend.

For would-be, currently-are, or has-been (like me) business managers, investment bankers, hedge fund managers, and reorganization lawyers, this book is a fascinating under-the-hood analysis of every stage of a financial business restructuring (not much about the operational side). For anyone interested in the thoughts and motivations of the Masters of the Universe who control so much of our world and its most famous companies, this book offers a brutally honest peek at how the sausage is made. It's not always pretty, but it is both entertaining and enlightening.

Personal Bankruptcy Arrives in China in March 2021

The process I noted in an earlier post has come to fruition, and the Shenzhen special economic zone will introduce the first personal bankruptcy law in China, effective March 1, 2021. It will apply to a quite limited number of people (a total of about 12.5 million residents in Shenzhen three years ago, as of 2017, and one must have been a Shenzhen resident for three years to qualify for the new bankruptcy procedure), though by people, I mean real people, as it is not restricted to merchants or even business-related debts. This is a really powerful and bold step forward, and many have expressed concern about the payment-morality effects of such a liberal procedure for escaping from one's debts (the common phrase "lao lai" 老赖 means "debt dodger" or someone who evades responsibility).

That's why a discovery in the final text of the new law really struck me today. I was comparing the language from an early 2015 draft, the June 2020 draft, and the final version, adopted on August 26, 2020. The new word for "discharge" used for years in the earlier drafts was "mian ze" (免责), loosely, "free/excuse from responsibility." But between June and August, that term was replaced in over a dozen instances by a slightly different term, "mian chu" (免除), again loosely, "exemption/remission." In the couplet forming this new term, the character for "responsibility/duty" (ze 责) was replaced by a much less morally laden character carrying the meaning "get rid of, remove" (chu 除), which is more or less redundant with the meaning of the common first character (mian 免, excuse/waive). Neutralizing the concept of a discharge of debt to remove connotations of excusing someone from duty and replacing this with a sterile, redundant notion of simply removing (technical) liability struck me as an interesting rhetorical move.

I don't know if any ordinary Chinese person would perceive a difference here, but the US played this rhetorical game in the Bankruptcy Code by replacing the judgmental term "bankrupt" with the neutral term "debtor." This latest move to re-coin the new Chinese word for discharge seems to me to follow along those same lines. [Incidentally, I checked the Enterprise Bankruptcy Law, and neither term figures prominently in that law, which doesn't confer any discharge at all, so the Shenzhen authorities had to come up with a more or less new term.]

If you have a better sense of the potential emotional/rhetorical impact of this change, let me know what you think (I'm probably making too much of it, but it was an interesting twist).

New Greek Bankruptcy Code

Responding to an EU Directive and what was likely already a long-simmering plan to revise a not entirely satisfactory patchwork of constantly shifting bankruptcy and insolvency laws, the Greek government recently released a draft of a new Code for Debt Settlement and Second Chance. A webinar earlier this week hosted by Capital Link offered a rare insight into this developing legislation, introduced by the architects of the new law. If all goes as planned in the legislature, the new Code will become effective in 2021. Watch for much more of this type of activity in other European countries in the months ahead.