A Note on Bankruptcy Auction with a Fair Bidder

What is it about?

In corporate bankruptcy auctions in India, the financial creditors choose the winner based on the bids and the share of bankruptcy surplus (bid value minus liquidation value) offered towards their claim settlement. We show that self-interested bidders allocate the entire bankruptcy surplus to the financial creditors, whose claim exceeds the bid. A fair bidder allocates the surplus between financial and operational creditors in proportion to their residual claims. The winning bid increases if the winner is fair, and the ratio of the residual claims of operational creditors to that of the financial creditors is greater than a threshold.

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Why is it important?

We obtained two significant theoretical results in the context of bankruptcy auctions under the Insolvency and Bankruptcy Code 2016, wherein the financial creditors select the winner. First, considering that the creditors’ committee, i.e., the auctioneer, maximises the claim recovery of the financial creditors, self-interested bidders propose to allocate the entire bankruptcy surplus to the financial creditors. Second, if the claim of the operational creditors is not too small relative to that of the financial creditors, and a fair bidder wins the auction, the aggregate recovery to creditors is higher than when the winner is self-interested.