Court-supervised reorganization procedures like Chapter 11 and the Canadian Bankruptcy and Insolvency Act require judges to consider a ¿best-interests test¿, i.e., to determine whether creditors are better-off under reorganization than liquidation. Using data on firms reorganizing in Canada, we show that evaluating the best-interests test strictly according to economic theory yields the same outcomes as a simple rule that compares the sum of payments under reorganization to a firm¿s liquidation value. We argue that bankruptcy judges need not be concerned with the economic details of the best-interests test; a simple rule will suffice.
FISHER, T. et MARTEL, J. (2007). Does it Matter how Bankruptcy Judges Evaluate the Creditors’ Best-interests Test? American Bankruptcy Law Journal, 81(4), pp. 497-514.