Contemplating a Corporate Governance Model for Bankruptcy Reorganizations : Lessons from Canada

What is the optimal form of corporate governance during court supervised attempts to reorganize and restructure a financially distressed firm? Corporate bankruptcy scholarship has contemplated this normative query against the backdrop of two prevailing models: the American Debtor-In-Possession Model and the more European-oriented Trustee Model. While the former allows the incumbent management to continue exercising its daily control of the firm during rehabilitation attempts, the latter dictates that incumbent management be replaced with a court-appointed official as soon as the formal bankruptcy proceeding is initiated. Neither of these models provides a perfect solution, and lately it has been suggested that a hybrid governance regime, combining elements of both models, is the better solution. Still, there is further disagreement about the optimal combination of elements. For example, it is not clear whether the court-appointed official should perform managerial tasks alongside the incumbent management. In this context, Canada offers a unique laboratory in which to evaluate such a hybrid reorganization regime. Canada's main corporate restructuring tool – the Companies' Creditors Arrangement Act (“CCAA”) – allows Canadian bankruptcy judges to appoint a “Monitor” to accompany the incumbent management and grants judges considerable flexibility in assigning tasks to this distinctive court-appointed official. As the title indicates, the Monitor is first and foremost an information intermediary. Thus, the Monitor can, inasmuch as her tasks and responsibilities are properly designed, satisfy the collective forum's information needs. The purpose of this Article is to advance the corporate reorganization governance debate in two respects: first, devising a systematic framework for analyzing an optimal hybrid reorganization governance regime; and second, introducing and critically examining the Canadian Monitor Model, thereby demonstrating its potential superiority