Rule Approval Could Affect Business Bankruptcy Filings

Bankruptcy Rule 2019 has been generating lots of debate in financial circles lately as new piece of legislation calls for changes to the long-standing rule.

Reuters carries the details on the Rule 2019 debate. The rule was developed more than 30 years ago so creditors would be able to recover their investments if a company’s chapter bankruptcy reorganization was successful.

But many things have changed in the past 30 years with the development of hedge funds and other investors who buy debt from the original creditors.

Hedge funds are groups that purchase debt in return for a claim or investment in the company. So they essentially buy debt for a minimal price and then receive benefits after a company emerges from bankruptcy.

Rule 2019 mostly affects hedge funds and other investors. Right now these groups are not forced to supply the bankruptcy court with information about their claims in the company.

But now the federal rules committee is trying to decide how much and what kind of information these groups should reveal or disclose during the proceedings.

The rule currently requires investors acting as a group to disclose information about their holdings when requested to do so by the bankruptcy judge. The proposed revision would make these groups reveal their interest or claims on a regular basis instead of upon request.

Those who want to revise the rule say that this would stop creditors from taking advantage of the bankrupt businesses by requiring them to disclose information like the value of their holdings, when they were acquired and amount purchased.

But there is disagreement on whether these changes would be beneficial. Opponents of the rule change say that being forced to share this information would force companies to reveal “trade secrets” and could give give other investors an upper hand in the bankruptcy process.

The review process by the federal rules committee should take about a year to determine whether this part of bankruptcy law needs to be revised.