Bankruptcy Tourism and the European Union’s Corporate Restructuring Quandary: The Cathedral in Another Light

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

For the last decade, the European Union has been reconceptualizing its corporate restructuring framework with the hope of bolstering capital markets and improving cross-border lending. Unfortunately, the system remains plagued by two intractable problems: divergent substantive law at the Member State level and jurists unaccustomed to guiding reorganization cases. The result is a system beset by uncertainty and disparate treatment. The EU is intent on addressing these problems, but progress has been elusive. The EU must work through recommendations and directives to encourage Member States to align substantive restructuring law with policy design. But Member States have been unresponsive to the EU’s recent efforts. The prospect of addressing these intractable problems in the foreseeable future is grim. Therefore, this Article breaks with current scholarship and urges the EU to adopt a radical alternative. The EU should consider making legal and structural changes that will facilitate bankruptcy tourism. I argue that affording corporations increased discretion as to the location of restructuring cases will aid in creating judicial hubs of optimal law and experienced jurists. The EU has the power to adopt my recommendations by simply modifying its own law and procedure, which should accelerate implementation timelines.

Ultimately, economists foresee an impending financial correction. The EU’s restructuring framework is unprepared to offer predictable and comprehensive reorganization outcomes for the next wave of distressed corporations. This Article proposes a novel vantage point from which to assess policy alignment.

For previous Roundtable posts on for bankruptcy tourism, see Wolf-Georg Ringe, “Bankruptcy Forum Shopping in Europe.”

The full article is available here. Forthcoming in the University of Pennsylvania Journal of International Law.

Bankruptcy Forum Shopping in Europe

By Wolf-Georg Ringe (University of Hamburg – Institute of Law & Economics; University of Oxford – Faculty of Law).

Over the past several years, European firms have been active in cross-border arbitrage to benefit from a more favorable bankruptcy regime. The European Insolvency Regulation (EIR), an instrument determining the competent courts and the applicable law in EU cross-border insolvency proceedings, has long sought to curb such efforts. A major reform which came into force in 2017 has the specific objective of further restricting abusive versions of forum shopping, in particular by introducing a three-month “suspension period” for forum shopping activities carried out shortly before the debtor files for insolvency.

In a recent article, I demonstrate that these efforts fail to achieve a satisfactory response to forum shopping. The key element of the reform, the suspension period, is both over-inclusive and under-inclusive in its scope of application and may, at best, be entirely without effect. The new rule will also create significant uncertainty and undermine effective ways of business restructuring.

Meanwhile, the reform does not address new variants of forum shopping, such as the use of the British “scheme of arrangement” by continental European firms. Such “procedural” forum shopping may be effected entirely without any physical relocation, as it does not come within the scope of application of the EIR.

The laudable goal of the EIR to improve the pricing of risks in cross-border insolvencies is jeopardized where the rules on jurisdiction are unclear or uncertain. The 2017 reform is a missed opportunity to improve the system by attaching substantive bankruptcy law and jurisdiction to a company’s registered office as the only clear and predictable connecting factor. Instead, the reform introduces new riddles and inconsistencies. Such steps will blur rather than improve the pricing of insolvency risk and thereby ultimately drive up the cost of capital.

The full article is available here.