Bail-outs and Bail-ins are better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress
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By Kristin van Zwieten (University of Oxford), Horst Eidenmüller (University of Oxford), and Oren Sussman (University of Oxford)

Kristin van Zwieten
Horst Eidenmüller
Oren Sussman

In a recent paper we argue that bail-outs or bail-ins are better than bankruptcy for the treatment of COVID-19 distress, even where there exists a reorganization procedure that functions well in normal conditions.

COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more “lockdowns,” multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the way in which they treat the cohort of newly bankrupt businesses.

In jurisdictions where a well-functioning reorganization procedure can produce value-maximizing outcomes in normal conditions, the temptation may be to subject this cohort to such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor “fit” for the treatment of COVID-19 distress. Distorting such procedures to accommodate the features of COVID-19 distress (or, in jurisdictions where there is not a reorganization procedure, introducing one designed with COVID-19 distress in mind) risks inhibiting the availability of credit for new projects in future, slowing the path to economic recovery.

The more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor’s liabilities, or a class thereof), or some combination of the two.

In our paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shut-downs, and we compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by developing principles to help guide the choice between bail-ins and bail-outs, and the design of either form of intervention.

We suggest that policymakers should intervene in ways that are proportionate, in the sense that they ought to confine themselves to that which is thought necessary to minimize the amplification of the economic shock caused by periods of trading shutdowns; that interventions should be designed to minimize distortions to efficient private bargains and private law rules; that transfers should be from the less financially constrained to the more financially constrained; that interventions should “fit” with the institutional apparatus responsible for administering them; and that the process of designing and delivering relief should be transparent.

We suggest these principles tentatively, mindful of the fact that policymakers may or may not be working with common conceptions of fairness and responsibility, and of the fact that some of our principles may only be able to be fully pursued at the partial expense of others. But we nevertheless hope that they offer a useful starting point for thinking about the design and delivery of novel forms of relief to debtors distressed by COVID-19 related revenue losses.

The Rise and Fall of Regulatory Competition in Corporate Insolvency Law in the European Union
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, International and Comparative | 0

By Horst Eidenmüller (University of Oxford; European Corporate Governance Institute – ECGI)

In a recent paper, I discuss the rise and fall of regulatory competition in corporate insolvency law in the European Union. The rise is closely associated with the European Insolvency Regulation (EIR, 2002), and it is well-documented. The United Kingdom (UK) has emerged as the ‘market leader’, especially for corporate restructurings. The fall is about to happen, triggered by a combination of factors: the recasting of the EIR (2017), the European Restructuring Directive (ERD, 2019) and, most importantly, Brexit (2019). The UK will lose its dominant market position. I present evidence to support this hypothesis.

Regulatory competition in European corporate insolvency law happened by accident: it was the unwelcome consequence of the entering into force of the EIR in 2002. The EIR was designed to eliminate forum shopping and to harmonize Member States’ jurisdiction and conflicts rules for international insolvencies. However, in practice, it did not achieve this end. The Regulation’s test for main insolvency proceedings, a company’s ‘Centre of Main Interests’, can be manipulated. Forum shopping became almost a signature feature of the EIR, and the UK emerged as the ‘market leader’ for corporate restructurings in the European Union (EU). The available data clearly confirms this assessment. The popularity of the UK as a restructuring venue also stems from the attractiveness of the Scheme of Arrangement—a procedure that is not within the scope of the EIR. Under the applicable European rules, restructuring decisions taken by courts in one Member State must be automatically recognized in all other Member States.

The regulatory landscape for corporate insolvency law in the EU is changing. The EIR was recast in 2017, the EU passed the ERD in 2019, seeking to harmonize Member States’ pre-insolvency restructuring regimes so that local businesses get local access to restructuring processes, and the UK will probably leave the EU in 2019.

I argue that the recast EIR will not significantly affect forum shopping and regulatory competition in corporate restructurings. However, the ERD will have such an effect, i.e. it will significantly reduce forum shopping and regulatory competition in corporate restructurings. This is because the ERD mandates that Member States implement certain key features of pre-insolvency restructuring regimes by 2021, effectively ruling out radical legal innovations departing from the new European standard. Unfortunately, the ERD is a ‘defective product’: it mandates inefficient procedures and should be repealed.

Most importantly, Brexit will eliminate the dominant competitor in the European restructuring market, i.e. the UK. This is because Member States will no longer be forced to automatically recognize decisions taken in UK restructuring proceedings. It appears that the restructuring market already anticipates this effect: one can observe a decline of the popularity of the Scheme of Arrangement in cross-border cases from 2016 onwards. I present evidence in the form of hand-collected data on cross-border Schemes of Arrangement to support this hypothesis.

The full article is available here.