Economic shocks create insolvency law-making space, generating opportunities for legal reform that may be absent in good times. Policymakers may suddenly acquire a mandate to resource institutions or ...drive through a change in the law where in good times such reforms were likely to be foiled by interest group capture, or simply unlikely to get sufficient political traction. A crisis, then, is an opportunity for the well-prepared insolvency policymaker. Insolvency rule-making in crisis conditions is, however, plainly also risky. Making best use of the opportunity implies making more than temporary changes to the regime. But design choices made mid-crisis will almost inevitably be influenced by the features of the crisis itself, generating a risk that the result of the reform effort will be distorted law, ill-suited to the achievement of the lawmaker’s objectives in the long run. This paper considers the permanent restructuring law reforms enacted in the UK during the first wave of the Covid-19 pandemic. At first glance, these reforms appear to exemplify the case of the well-prepared policymaker, poised to drive through carefully planned changes to the law when the opportunity arises. On closer inspection, however, a different picture emerges. The permanent measures, which were enacted in a fast-track legislative process, departed from the Government’s pre-pandemic plan in material and undesirable ways. In some cases, these deviations mean that the original objective has not been achieved at all; in others, the objective has been at least partially achieved, but at unnecessary cost. Overall, the UK experience appears to better exemplify the risks of attempting insolvency law reform in a crisis, than the opportunities that a crisis affords to an insolvency policymaker.
Under English law, directors’ duties change in the vicinity of insolvency so as to require enhanced regard for creditors’ interests: that is the rule in West Mercia Safetywear v Dodd. This rule is ...conventionally analysed as a constraint on directors deploying assets in risky ventures in insolvency. However, a review of the case law shows that the rule performs a very different function: the regulation of payments to creditors in the lead-up to insolvency proceedings. On its own, the rule functions as an alternative to a preference action, providing recourse against the director who authorised the payment, rather than against the payee. Combined with accessory liability rules, the rule can also function as a substitute for a preference action, providing a different way of obtaining recourse against the payee. The first of these functions, however, raises a serious remedial problem—acknowledged by the courts—that appears ripe for consideration at an appellate level.
Corporate Restructuring Laws Under Stress van Zwieten, Kristin; Eidenmueller, Horst; Sussman, Oren
European business organization law review,
06/2023, Volume:
24, Issue:
2
Journal Article
Two events are currently changing the landscape for business restructurings in the European Union: the ‘Restructuring Recommendation’ (RR) of the European Commission, issued in 2014, and the 2015 ...recast of the European Insolvency Regulation (EIR). In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that the recast EIR and the RR do not dovetail perfectly—a restructuring proceeding as proposed by the RR would not necessarily be within the scope of the recast EIR; we also suggest that, in any case, the EIR is not optimally designed to facilitate restructurings, given its treatment of secured creditors. Regarding the regulatory approach pursued in the RR, the Commission rightly pushes towards harmonisation with respect to Member States’ restructuring regimes—regulatory competition is not a sensible regulatory alternative in this area. However, we criticise both the methodology and scope of the harmonisation proposal of the RR: sketchy minimum harmonisation of restructuring rules leaves huge potential for residual diversity in Member States’ restructuring laws, and the Commission’s narrow focus on restructuring proceedings ignores several aspects of the complicated interaction between the Member States’ formal insolvency laws and the restructuring mechanism proposed. Further, we disagree with the substantive recommendations for Member States’ restructuring laws suggested by the RR: they wrongly require financial difficulties or a likelihood of insolvency as an entry test for the recommended restructuring proceeding, and the process appears susceptible to abuse by sophisticated financial investors—it does not provide for the mandatory appointment of a supervisor and allows significant curtailments of creditor rights without sufficient safeguards in place. Instead, we propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency, provided that it is economically viable and that the filing is not abusive.
The Shadow Payment System Awrey, Dan; van Zwieten, Kristin
The Journal of corporation law,
06/2018, Volume:
43, Issue:
4
Journal Article
Peer reviewed
Banking, derivatives, and structured finance may attract the lion's share of accolades and approbation in global finance--but payment systems are where the money is. Historically, payment systems in ...most jurisdictions have been legally and operationally intertwined with the conventional banking system. The stability of these payment systems has thus parasitically benefited from the unique prudential regulatory strategies imposed on deposit-taking banks. These strategies include emergency liquidity assistance or "lender of last resort" facilities, deposit guarantee schemes, and special bankruptcy or "resolution" regimes for failing banks. Importantly, these strategies have the practical effect of relaxing the strict application of corporate bankruptcy law, thereby enabling banks--and the payment systems embedded within them--to continue to perform their core payment and other functions even under conditions of severe institutional stress.
India is poised for significant reform to its corporate insolvency laws, including the introduction of a new rescue procedure. The reforms follow two decades of sustained criticism of the law, ...critics complaining of lengthy delays and a range of related costs in the disposal of proceedings. This article focuses on the most notorious of India's existing insolvency procedures, a corporate rescue procedure established under the Sick Industrial Companies (Special Provisions) Act 1985. On the eve of its repeal, the article presents the results of an investigation into how this Act operated over time and why. Its central contribution is to report new evidence of the influence of the courts on the operation of the Act. The article reveals how key provisions of the Act were interpreted and reinterpreted by judges in attempts to rescue companies destined for liquidation, and to protect some of their stakeholders (especially employees) in the interim. The evidence of these innovations offers a new and compelling explanation for why the rescue procedure became slow and costly. Acknowledging and understanding the influence of the courts on the operation of this procedure may help to guard against India's new corporate rescue procedure suffering a similar fate.
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