What is Chapter 10?
Chapter 10 (formally referred to as Chapter X) is a former portion of the bankruptcy code that dictated bankruptcy processes and procedures for companies and individuals.
How Does Chapter 10 Work?
Chapter X was originally part of the Bankruptcy Act of 1898 and the subsequent Chandler Act of 1938. It offered a framework for the overall reorganization of financially distressed corporations and gave relief to them by requiring the appointment of at least one trustee or examiner for organizations in bankruptcy. Chapter X also provided a detailed process for determining the value of a bankrupt business, limited the rights of the organization’s creditors and shareholders, developed a process for creating and approving reorganization plans and allowed judges to confirm reorganization plans even if shareholders and creditors disagreed with those plans.
Bankruptcy courts and struggling corporations used Chapter X to decide whether to try to restore a company to viability or just liquidate its assets. The code generally required judges to do whatever was in the best interests of the shareholders. The process of determining which path was better and then implementing that path was (and still is) a cumbersome procedure both administratively and financially.
Chapter X introduced the concept of disinterestedness, which meant that trustees and other court-appointed professionals associated with a bankruptcy case had to affirm their lack of personal interest in the outcome as a condition of their employment. Another significant introduction was Chapter X's trustee powers -- they were so great that they effectively removed companies' existing management from power.
Why Does Chapter 10 Matter?
In its time, Chapter X was just one of several chapters under which companies could file bankruptcy. In general, the extensive, detailed rules in Chapter X discouraged many corporations from entering bankruptcy. Chapter X was also far less attractive than Chapter XI of the Chandler Act, which did not displace the management of the company. Chapter XI also gave management more control over the reorganization plan and in stating how the company would repay creditors or liquidate assets. At the time, Chapter XI was intended for small, privately owned businesses and individuals, but a series of court battles (eventually culminating in a Supreme Court decision) made filing under Chapter XI a viable option for corporations.
In 1978, the Bankruptcy Reform Act of 1978 eliminated Chapter X, combining and revising its ideas with other legislation and bankruptcy laws into what is now known as Chapter 11. The Bankruptcy Reform Act of 1994 and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 each continued to reform aspects of Chapter 11 and bankruptcy law in general, but many of the ideas in the original Chapter X are still with us today.