Mr. WILCOX. That is my idea.

Mr. PETTENGILL. We cannot constitutionally do that, because it would be a conferring of judicial power upon the Commission.

Mr. WILCOX. Yes; that is true. That is my thought.

But, Mr. Pettengill, I do not want to get away from, and I am going to take just one more second-I do not want to get away from the original thought that is back of this legislation, and that is that these committees, in their negotiations on behalf of the bondholders, should be subjected to scrutiny and regulation and control, and I do not want to leave the impression that I think that all committees are bad. I do not think that you can make adjustments of public debts without a bondholders' committee. I think that they have got to be. We have to have bondholders' committees. You have to have some central agent.

You take the little town that I represent: We had a $17,000,000 debt. That was in the hands of about 6,000 different people. Well, you cannot go out and negotiate with 6,000 individuals. You have to have one agency to deal with, and that has to be a bondholders' committee, so that committees are necessary things.

And some of them do an excellent job. There is not criticism of a great many of them; but it is just unsound to permit a committee to carry on these negotiations and to handle millions of dollars' worth of bonds and millions of dollars in money, with nobody to see to it that it properly performs its duty toward its own clients.

The CHAIRMAN. We thank you, Mr. Wilcox.

Mr. WILCOX. Thank you.

The CHAIRMAN. The committee will stand adjourned, to meet tomorrow morning at 10 o'clock, when we expect to hear Mr. Sabath on this bill. We hope to conclude the hearings.

(Thereupon, at 12:20 p. m., the committee adjourned, to meet the following morning, Wednesday, July 21, 1937, at 10 a. m.)

TO AMEND THE SECURITIES ACT OF 1933

WEDNESDAY, JULY 21, 1937

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met at 10 a. m., Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will be in order. At our last meeting, it was suggested by Mr. Wolverton that the Securities and Exchange Commission furnish the committee with a comparative analysis of the Sabath bill and the Chandler bill, and an analysis of the pending bill, H. R. 6963. That information is before us and it may be included in the record at this point.

(The analyses referred to are as follows:)

COMPARATIVE ANALYSIS OF H. R. 6439 (THE "CHANDler Bill") anD H. R. 6963 (THE "SABATH BILL")

The following is a comparative analysis of H. R. 6439, introduced by Congressman Chandler on April 15, 1937, and of H. R. 6963, introduced by Congressman Sabath on May 11, 1937, as reported from the Committee on the Judiciary under date of June 17, 1937 (Rept. No. 1042). A similar comparative analysis of the Sabath bill and the Lea bill (H. R. 6968) has also been submitted to the Committee on Interstate and Foreign Commerce.

It is understood that the committee on the Judiciary has voted to report the Chandler bill with certain changes of substance, as well as more extensive changes of a purely formal nature. Copies of the committee's report, or of the bill as to be reported, are not available at this time, but to the extent that the committee is known to have taken a definite position with respect to particular substantive changes, attention will be called to such changes, where material.

GENERAL SCOPE OF THE BILLS

The Chandler bill contemplates a revision of the entire Bankruptcy Act, with the exception of section 77, the railroad reorganization section. Section 74, for the relief of noncorporate debtors, and section 77B, the corporate reorganization section, have been completely rewritten, and have been incorporated as subsections I and II, respectively, of the new section 12.

The new subsection I (p. 26 and following) provides a method whereby any debtor, individual or corporate, may effectuate a plan for the settlement, satisfaction or extension of the time for payment of unsecured debts.

The new subsection II (p. 43 and following) is available only to corporations (p. 45, line 14). It provides a method for altering or modifying the rights of creditors, whether secured or unsecured, and for the alteration or modification of the rights of stockholders in conjunction therewith (p. 50, lines 16 to 20). A petition under subsection II must state specific facts showing why adequate relief cannot be obtained under subsection I (p. 46, line 23).

The Sabath bill does not in terms amend the present sections 74 and 77B. It does, however, add to chapter VIII of the Bankruptcy Act (the chapter which includes those sections), a new section 77C, the provisions of which are applicable to all proceedings under the present sections 74 and 77B, wherein the liabilities of the individual debtor or debtor corporation, as the case may be, include obliga

1508-37-20

tions in a total amount of $250,000 or over. In the case of proceedings under section 74, such obligations must be evidenced by at least ten credit instruments severally owned by not less than ten persons.

Corporate reorganizations loom larger in importance than proceedings involving individual debtors. As stated in the comparative analysis of the Lea bill (H. R. 6968) and the Sabath bill, the Lea bill is not intended to apply to proceedings involving individual debtors. For these reasons, and in order not unduly to lengthen this analysis, the following discussion will be limited to a comparison of the Sabath bill and the Chandler bill insofar as they affect corporate reorganization proceedings.

PROVISIONS OF THE SABATH BILL

The provisions of the Sabath bill affecting proceedings under section 77B (and sec. 74 as well) relate primarily to the part to be played by the Securities and Exchange Commission in such proceedings, by way of intervention, the proposal of plans, the filing of reports on plans and reports on allowances for compensation or reimbursement, and the approval or disapproval of committee agreements and the membership of committees. These provisions will be discussed in more detail below. In addition, the Sabath bill requires the debtor to file a plan within a specified time. Subsection (c). It limits the aggregate compensation of trustees, custodians, and receivers appointed in any such proceedings. Subsection (j). And it places certain' restrictions on the solicitation of acceptances or rejections of plans. Subsection (g).

PROVISIONS OF THE CHANDLER BILL

The provisions of section 12-II of the Chandler bill with respect to the appointment of a disinterested trustee and with respect to the proposal, approval and acceptance of plans are deemed to be of sufficient importance to warrant separate discussion below. In addition to those provisions, subsection II, representing as it does a complete revision of the present section 77B, contemplates a number of other significant changes in the corporate reorganization section which fall outside the scope of the Sabath bill.

Venue. The provision of section 77B (a) permitting the petition to be filed in the jurisdiction of incorporation has been eliminated. The petition must now be filed in the jurisdiction in which the corporation has had its principal place of business or principal assets for the greater portion of the 6 months preceding the filing. Page 45, line 24 et seq.

Lists of security holders.-Persons other than the debtor are to be required to produce this information. The court may, for cause shown, impound the same, but must make the use thereof available to creditors and stockholders. Page 56, line 8 et seq.

Right to be heard.-Indenture trustees, creditors, and stockholders are to have the right to be heard on all matters. Page 75, line 7, et seq. Their right to be heard, unlike that of the debtor itself, is now restricted to certain matters, unless a petition for intervention is granted. Section 77B (c). It is understood that changes are contemplated in the proposed provision with respect to the right of employees' organizations to be heard.

Reports by trustee.-Periodic reports are to be filed by the trustee and transmitted to creditors and stockholders. Page 80, line 22, et seq.

Management.-Plans must contain equitable provisions for the selection of the management of the continuing or successor company, and the court must scrutinize the persons selected. Page 53, line 15; page 66, line 9.

DISINTERESTED TRUSTEE

Under the Chandler bill (p. 54) the court is required, upon approval of a petition, to appoint one or more disinterested trustees. It is understood that the Committee on the Judiciary has voted to report an amendment to this provision, giving the court discretion to continue the debtor in possession where its scheduled liabilities are $250,000 or less. Where a disinterested trustee is appointed, however, creditors and stockholders of the debtor are ineligible for such appointment, as are underwriters of any outstanding securities of the debtor, underwritten within 5 years, and directors, officers, or employees of the debtor, or of any such underwriter. The trustee is expressly authorized, however, to employ officers of the debtor at a rate of compensation approved by the court. Page 61, line 13.

INVESTIGATIONS BY TRUSTEES

The disinterested trustee is required (p. 57 of the Chandler bill) to inquire into and report to the court upon the past conduct of the business, including the activities and achievements of the management, and any other matter relevant to the formulation of a plan.

PROPOSAL OF PLANS

Under the present section 77B (d) the debtor is authorized to propose a plan, without restriction, but percentage requirements are imposed with respect to the proposal of plans by creditors or stockholders.

Under subsection (d) of the Sabath bill, the debtor corporation is required to file a plan within 6 months after the petition or answer is approved, but the judge may grant extensions for further periods of not more than 90 days each. Subsection (c) authorizes the Commission to propose plans. That power is not conferred upon the Commission by the Chandler bill or the Lea bill.

Under the Chandler bill, the independent trustee is charged with the duty of preparing and filing a plan within a time fixed by the court, or a report of his reasons why a plan cannot be effected (p. 58, line 5). Creditors and stockholders are expressly authorized (p. 58, lines 2 to 4) to submit to the trustee suggestions for the formulation of a plan, or proposals in the form of plans. The court must then hold a hearing on the plan or report filed by the trustee, and for the consideration of any objections which may be made, or of any amendments or other plan which may be proposed by any creditor or stockholder. Notice of such hearing must be given to the debtor, the creditors, and stockholders, the indenture trustees, the Secretary of the Treasury, and the Securities and Exchange Commission.

SUBMISSION TO CREDITORS AND STOCKHOLDERS-COURT APPROVAL OF PLANREPORT BY SECURITIES AND EXCHANGE COMMISSION

Under the provisions of the Chandler bill (pp. 58-60, inclusive), no acceptance of a plan or authorization to accept a plan may be solicited until after the court has approved such plan as fair and equitable, and feasible. The Sabath bill does not make such approval a prerequisite to solicitation, and some courts have doubted whether they even had the power under section 77B (d) to pass upon the fairness of a plan at that stage of the proceedings. After the necessary acceptances have been obtained, final "confirmation" of the plan is necessary, under the Chandler bill (p. 65, line 19 et seq.) just as under the present section 77B (f).

Both the Sabath bill and the Chandler bill make provision for the reference of plans to the Commission and the allowance of a reasonable time for the study thereof by the Commission. The two bills differ as to what plans must be so referred and when the reference is to be made.

Under the Chandler bill (p. 58), the court may refer a plan in any case. Where the scheduled indebtedness exceeds $5,000,000, however, (it is understood that this limit is to be reduced to $3,000,000) the court must refer to the Commission any plans which the court regards as worthy of consideration. Such reference

must be made before the court approves the plan, and acceptances or authorizations to accept may not be solicited until after such approval order has been entered.

Under subsection (f) of the Sabath bill, all plans in proceedings in which the liabilities include obligations of $250,000 or more must be referred to the Commission, before the plan is confirmed, court approval of a plan not being a prerequisite to the solcitation of acceptances or authorizations to accept, under the Sabath bill. But, under subsection (g) (1), such acceptances or authorizations may not be solicited until after the Commission has been given an opportunity to render a report.

Under both bills, the Commission may notify the court that it will not file a report, or may file its report before the date fixed, thus avoiding unnecessary delay.

Under both bills, acceptances or authorizations may not be solicited until after there have been transmitted to the creditors and stockholders affected by the plan (A) a copy of the plan itself together with a summary thereof, (B) the opinion, if any, of the court, approving the plan, or an approved summary of such opinion, (C) the report, if any, of the Commission, or a summary thereof prepared by the Commission, and (D) such other matters as the court may require. Chandler bill, page 59, line 18 et seq.; Sabath bill, subsection (g).

Under both bills, acceptances or authorizations given, procured, or received in violation of the foregoing provisions are invalid.

FEES AND EXPENSES

Under subsection (i) of the Sabath bill, the court may not, with certain exceptions, make any allowance or payment of compensation or reimbursement out of the estate unless the Commission has been allowed a reasonable time for investigation thereof, and the Commission is required to make a report thereon within such time. The Chandler bill contains no such specific requirement, although the Commission must be given notice of all applications for such allowances (p. 64, line 2) and may, of course, as intervenor, express its views with regard to any proposed allowances. Compensation or reimbursement must be denied to persons who have bought or sold securities of or claims against the debtor in contemplation of the proceedings or after the commencement thereof. Chandler bill, page 65,

line 1.

INTERVENTION BY THE COMMISSION

Under subsection (c) of the Sabath bill the Commission may intervene by filing a notice of appearance, and is entitled to be heard on all questions with respect to which the debtor, any creditor or shareholder, or any intervening party may be heard. The Chandler bill confers a like power upon the Commission (p. 75, line 21 et seq.).

ALLOWANCES TO COMMISSION

Under subsection (k) of the Sabath bill the Commission is entitled to costs, to be allowed out of the estate. The Chandler bill contains no such provision.

NOTICES TO THE COMMISSION

Under subsection (c) of the Sabath bill, the Commission must be given notice of all steps taken in any proceeding to which the bill applies, and there must be transmitted to the Commission copies of the more important papers in such proceedings. It is understood that the Committee on the Judiciary has under consideration the inclusion of a similar provision in the Chandler bill. The original bill specifically provided for notice of the more important steps, and, in addition, the Commission would, of course, be entitled to all notices to which intervening parties were entitled.

QUALIFICATIONS OF COMMITTEE MEMBERS; TERMS OF PROXIES AND DEPOSIT AGREEMENTS

Subsection (h) of the Sabath bill requires the Commission to approve or disapprove the provisions or limitations of any committee agreement and the membership of any committee, and to file a notice of its approval or disapproval in the proceedings. The Commission is required to give such approval unless it makes certain findings specified in this subsection. These findings are referred to in detail in the comparative analysis of the Sabath bill and the Lea bill. As stated in such analysis, disapproval by the Commission of a committee agreement or of the membership of a committee does not prevent such committee from soliciting, but, so far as the committee agreement is concerned, the court presumably could, under the next to the last sentence of section 77B (b), disregard any objectionable provisions.

The Chandler bill does not confer upon the Commission any jurisdiction over committee agreements or membership. It does require (p. 76, lines 4 et seq.) all persons representing more than 12 creditors or stockholders to file with the court a sworn statement with regard to the facts surrounding his appointment and the securities or claims owned by him and by the persons represented by him, together with a copy of the instrument authorizing him to act. The Chandler bill also contains (p. 77, line 14) a provision not unlike that of the present section 77B (b), authorizing the court to examine and disregard any provision of any such instrument.

LIMITATIONS ON TRUSTEES' FEES

Subsection (j) of the Sabath bill, the aggregate annual compensation of any one person for services as trustee, custodian, or receiver in all proceedings under sections 74 or 77B in which he has been appointed as such is limited to $10,000. Under the Chandler bill, the allowances are based upon the services rendered in the particular proceeding in which the allowances are to be made.