Here’s what investors need to know about America’s Chapter 11 provisions and how they compare to Australia’s regime

Why would investors in Australia care about America’s Chapter 11 provisions? Well for a start, if they want to invest in US stocks – or even just watch Wall St – it is important to know how it works in case a company investors are in or are following goes into Chapter 11. It is also fascinating to look at the regime and compare it to Australia’s. Because perhaps our regime is not giving companies the best hope of survival, and ironically the best hope for investors to get their money back.

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How Chapter 11 works

As in Australia, the Chapter 11 regime is for companies that cannot meet their debts as and when they fall due. This provision allows businesses (or individuals, but this is mostly used by companies) to restructure debt while continuing operations. The business owners/management stay in control as a ‘debtor in possession’, but have to implement a reorganisation plan that creditors (and a court) must ‘sign off’ on. Often this saves the business as it enables debts to be paid in a way that can keep the business operating and give the best hope for everyone to see their money.

If companies fail to reorganise or have no viable path forward, then Chapter 7 applies. In this instance, the business ceases operations and the assets are liquidated to pay credits. This is cheaper and faster, but investors will lose their money and creditors might (unless the company has a lot of assets).

Sometimes, companies may enter Chapter 7 straightaway and this happened to Texan car dealer and lender Tricolor Holdings earlier this week. 68% of Tricolor’s borrowers had no credit score and more than half didn’t have driving licenses…so, we think that sums up what you need to know about it.

One day prior to the move, one of its key lenders (Regional bank Fifth Third) disclosed it would write down most of a US$200m loan after it unearthed fraud by one of its corporate clients which flowed through to what had been disclosed to it to borrow through the warehousing deals.

There were concerns expressed that Wall St investors are ignorant of the true state of the economy and there is merit to that debate, but that’s for another article. But the reason we bring this case study up is because of how the Chapter 11 and Chapter 7 regimes compares to that of Australia.

How does this compare to Australia?

If you’ve owned an ASX stock in voluntary administration you will see the notice come not from the company but from an insolvency firm. There’s good reason for this – because the administrator replaces management immediately.

On the plus side, it creates a disincentive to file early because it can lead to a loss of reputation amongst members of the board. Moreover, administrators need to recommend a path within 25 business days so there will be a conclusion sooner, but this isn’t always the case. It is more pro-creditor in theory, rather than enabling the company to reset and recover – heck, courts in American can override dissenting creditors!

The stats back this up. Voluntary administration in Australia leads to liquidation in the majority of cases (specifically 60-80% of cases) and only 10-20% emerge and continue operating similar to as they were before (i.e. in the same industry rather than buying a new business). Meanwhile in America, 63% of corporate bakruptcy filings were seeking reorganisation rather than liquidation and in the first half of 2025, this was 61.2%.

Moreover, there are companies that have filed for Chapter 11 multiple times but have remerged such as Claire’s Holdings, Forever21 and Sbarro – with the first of these doing so twice in the last decade. Spirit Airlines filed for Chapter 11 in November 2024 and emerged in 2025, only to have United Airlines’ CEO use the phase ‘off the cliff they go’ when asked what would happen to Spirit next. Compare that to what happened to Rex!

Conclusion

If you’re invested in a stock in America that goes into Chapter 11, you’d be wrong to think its ‘All over red rover’. It is effectively not much different to when ASX small caps announce a ‘strategic review’, with effective administration a last resort. While creditors understandably want the best chance of getting their money back, we think the evidence we’ve shown begs the question as to whether or not our regime works best for all (yes, even for creditors).