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PostBusiness Insolvency Laws: Towards a "Rescue" Culture (Patrick Mears, Germany, 03/29/18 2:58 am)
We hope that this note finds WAISers well.
Son Eddie and I have seen in recent WAIS posts some "stray" comments on debtors' prisons and distressed sovereign debt, but nothing on national and international insolvency laws, at least as far as we can recall. There is, nevertheless, a great deal of activity in this area, particularly with respect to the harmonization of national laws addressing reorganization of distressed business entities. Consequently, we think that perhaps WAISers might be interested in some recent and important developments in this area.
First, just a brief overview of the history of these laws. As a general proposition, prior to the 19th Century, national bankruptcy laws provided only for the liquidation of insolvent business enterprises. In common law and civil law countries, the focus of legislation was to provide for a quick liquidation of all of the bankrupt's assets and the distribution of the sale proceeds to creditors. Other objectives, e.g., the preservation of jobs and potential returns on investment, were by and large of little concern to legislators.
This situation began to change in the 19th Century, particularly in the United States. In 1874, the US Congress enacted a law allowing business "compositions," which permitted a financially troubled business to restructure its debts by means of reduced payments over an extended period of time, provided that a required amount of creditors approved the scheme. With the explosive expansion of railroads after the American Civil War, during which many lines became insolvent, a creative practice for their reorganization was developed by a select group of law firms located in financial and industrial centers, especially in New York City.
The most important development in this area was the enactment in 1978 of Chapter 11 to the United States Bankruptcy Code, which permits a financially troubled business to reorganize its capital structure by means of a bankruptcy court-approved, "plan of reorganization" that has been voted on by creditors. During this effort, the pre-Chapter 11 management may typically remain in control of the debtor's operations and not be replaced by a court-appointed trustee. Eight years after enactment of Chapter 11, a similar concept was adopted in the United Kingdom. Parliament provided the statutory framework for "company voluntary arrangements" in the Insolvency Act 1986. This process kick-started a worldwide revolution that is still ongoing, within which national laws now permit a business debtor to control its efforts to restructure, albeit under the supervision of a court and close scrutiny of its creditors.
Since the mid-2000s, a liberalizing trend has appeared in national insolvency legislation, which provides for accelerated restructurings of distressed businesses with minimal court control. In 2014, the European Commission issued a Recommendation that all EU Member States adopt "rescue culture" legislation that would provide this type of expedited restructuring to save the troubled enterprise, employee jobs and, if possible, equity investments.
Because the response of the Member States to this Recommendation was adjudged lukewarm at best, the Commission has now issued a Proposed Directive which is now being vetted by the Council and the European Parliament, as well as by groups of experts and stakeholders. Across the Pond, American business reorganization practice has since shifted from plan reorganizations, which have been viewed as too expensive and risky, to expedited sales of core assets of Chapter 11 business debtors on a going concern basis, as permitted by section 363 of the US Bankruptcy Code.
Eddie and I have published two articles on this topic that we have co-authored (along with Emeritus Professor Harry Rajak of Sussex University with respect to the latter article). These pieces were published in a Lexis/Nexis publication in 2017 and 2018.
Patrick E. Mears and Edward O. Mears. "The Advance of 'Rescue Culture' Business Insolvency Laws: The Long and Winding Road from Chapter 11 to the 2016 Proposed EU Directive." Pratt's Journal of Bankruptcy Law 13.3, April/May 2017.
Harry Rajak, Patrick E. Mears, and Edward O. Mears. "What's Past Is Prologue: The European Movement Toward Harmonized Pre-Insolvency Business Restructurings Contrasted with The American Preference for Going-Concern Asset Sales." Pratt's Journal of Bankruptcy Law 14.3, April/May 2018.
JE comments: The two articles are available to Lexis/Nexis subscribers, and I presume, those with access to JStor.
Congratulations, Pat and Eddie! Tell me, how does your father-son scholarship team organize its writing projects? Is each assigned a single section start to finish, or do you divide up specific tasks for the entire article--i.e., literature review, first draft, editing? (That you are in Germany and Japan respectively must add extra complexity to the process.)
Pat and Eddie's topic is far from esoteric. Without insolvency and bankruptcy laws, you cannot have business. Is the rise of the "rescue culture" due to the ever-increasing influence of the powerful elite, or because of the goal of preserving jobs?
Insolvency and "Ease of Doing Business"; on Father-Son Collaborative Writing
(Patrick Mears, Germany
03/31/18 8:07 AM)
This email responds to John E's questions and comments made concerning my last post on the topic of "rescue culture insolvency legislation."
First, John commented on the contemporary relevance of this legislation and, to illustrate his comment, here is an excerpt from our first article on the topic concerning the World Bank's annual "Ease of Doing Business Survey."
The World Bank's "Ease of Doing Business" Survey
In 2003, the World Bank instituted its "Ease of Doing Business" Survey of 190 economies by measuring on a yearly basis their performance in establishing regulatory environments that are conductive to the creation and operation of small to medium enterprises ("SMEs"). The survey determines rankings by sorting the aggregate distance to frontier scores on 10 topics, each consisting of several indicators, granting equal weight to each topic. One of the topics is "Resolving Insolvency," and consists of four separate "indicators," (i) average time to resolve insolvency proceedings, measured in years; (ii) average cost of administration of proceedings, measured in percentage of the bankruptcy estate's total asset values; (iii) recovery rates realized by creditors in these proceedings, measured by cents recovered on the dollar; and (iv) the strength of each economy's insolvency framework, determined on a scale of 0-16.
This rough analytical tool permits investors to evaluate, at least initially, the pluses and minuses of investing in a particular economy, either through foreign direct investment or via foreign trade in goods and/or services. However, this ranking system has, from time to time, stimulated economies to enact laws and regulations affecting the 10 categories in order to increase their rankings. This phenomenon occurred recently in Chile between 2012 and 2014, when Chile adopted new insolvency legislation, including the creation of a corporate rehabilitation proceeding embodying "rescue culture" norms. Other economies have recently followed Chile's lead in reforming their insolvency laws and, in so doing, have enacted certain aspects of "rescue culture" in legislation providing for rehabilitation of financially troubled commercial enterprises. For example, in 2017, Brunei Darussalam's "Overall" ranking increased from place 97 to 72 from the year before, and in the "Resolving Insolvency" category, Brunei's rank increased from 97 to 57. The World Bank recognized that, during this one-year period, Brunei enacted new procedures for business reorganizations, including processes that facilitated the continuation of the debtor's business during the reorganization proceedings.
For foreign businesses faced with a decision where to make a substantial investment in another country, the results of an Ease of Doing Business Survey will be simply one factor among many in making that decision. This data is (or should be) a relevant factor when such a potential investor first embarks on its investment analysis, but this information should be supplemented by other information (e.g., advice from an expert law firm domiciled in the target country) as the investor's analysis is further refined.
Now, about our collaborative writing. Concerning how we divide our responsibilities for our articles, this is determined, generally speaking, on an ad hoc analysis. Much of the information in our first article together was contained in a number of prior articles that I had written on international insolvency law reform. So Eddie and I simply divided up the responsibility of tailoring "his" and "my" allotted sections for this new piece and supplementing them. Concerning the second article, the idea for this piece came from a presentation made by Professor Reinhard Bork of the University of Hamburg at an insolvency law seminar given in Brussels last June, which seminar both Professor Harry Rajak and I attended. So in deciding who was to do what concerning this newer piece, Harry and I agreed on who would do what for the first draft. After that, it was a matter of all three of us deciding who would write and edit what was to come.
I hope that the foregoing adequately responds to John's questions. In short, there was no science to our methods.
JE comments: Absolutely, Pat. Ever since the "Chicago Boys" days, Chile has been disproportionately influential with its neoliberal reforms. Couldn't we say that "rescue culture" insolvency laws go against the central tenets of neoliberalism?