Bankruptcy Tourism and the European Union’s Corporate Restructuring Quandary: The Cathedral in Another Light
The US bankruptcy system is regarded as the preeminent bankruptcy system in the world due to its ability to secure high creditor recovery rates, preserve value for stakeholders, and facilitate successful restructurings of financially viable entities. It is recognised as ‘the model to which European restructuring laws should aspire’ (see indicatively the EU Commission’s ‘Study on a New Approach to Business Failure and Insolvency’ (2016), Tilley (2005) and Pochet (2002)). In fact, the EU has been extremely clear about its aspirations and the reasons for them. One of the EU’s primary policy objectives is to strengthen the economy and the single market by stimulating investment to create jobs. Bolstering capital markets and encouraging cross-border investment is a prerequisite to this objective. The free flow of capital is one of the EU’s fundamental principles. But suboptimal restructuring processes diminish creditor recoveries and inhibit capital flow. Divergent restructuring laws preclude successful restructurings and risk assessment, which drives up borrowing costs and—in many cases—restricts access to credit entirely. This is the primary reason the EU has focused on modeling an optimal restructuring framework for implementation across Member States.
Unfortunately, as it currently exists, the framework is undermined by two intractable problems: 1) significant divergence of substantive restructuring law across Member States that undermines predictability and promotes disparate treatment; and 2) lack of restructuring experience in the judiciary that suppresses efficient and successful restructurings. Scholars have suggested various means to address these problems, but progress has been elusive. Indeed, the EU works through recommendations and directives in order to encourage Member States to make substantive changes to national law. The EU has repeatedly attempted to encourage Member States to modify substantive restructuring law to align with policy objectives, but the urgings have been met with inaction. There is no reason to believe that this intransigence will abate any time soon.
My Article ‘Bankruptcy Tourism and the European Union’s Corporate Restructuring Quandary: The Cathedral in Another Light’ (forthcoming in the University of Pennsylvania Journal of International Law) proposes a novel vantage point from which to view the EU’s restructuring framework. The EU cannot abide a protracted timeline for correction. Instead, the EU should consider a radical alternative: facilitating bankruptcy tourism in order to afford corporations increased discretion as to the location of restructuring cases. If implemented, certain Member States will aggressively modify substantive and procedural restructuring laws in order to attract Megacases. In a new regulatory environment premised on a forum-shopping model, distressed corporations will be able to easily access restructuring laws in a variety of Member States. In some respects, the market of distressed companies will help select which Member States have optimal substantive law and procedure. As cases pool in a select group of jurisdictions, judges in these courts will repeatedly encounter meaningful restructuring issues and develop a thoughtful approach to key, case-dispositive issues. Over time, a more predictable restructuring system emerges, improving creditor recoveries, bolstering capital markets, and encouraging cross-border lending. This virtuous cycle may sound optimistic, but this phenomenon has animated the US bankruptcy system over the last 30 years.
My legislative proposals focus on a new conceptualization of a company’s centre of main interests that better aligns EU venue provisions with US law but with meaningful distinctions to avoid abuse. I acknowledge that easing venue regulations increases the risk of abusive or fraudulent tourism. Consequently, I further propose procedural changes that empower courts to better investigate malfeasance that may be the true motivation for tourism.
Ultimately, there is extensive literature exploring the EU’s restructuring framework and how to improve it. This Article offers a view of the cathedral in another light. Controlled bankruptcy tourism may be a necessary lever for addressing intractable framework deficiencies. By fostering the creation of judicial hubs with optimal restructuring laws and experienced jurists, tourism would allow the EU to promptly address legal and structural deficiencies. But in order to enjoy these benefits, the EU must first revise its restructuring laws in order to facilitate tourism. My Article includes multifaceted proposals designed to encourage the beneficial aspects of bankruptcy tourism but, at the same time, avoid negative externalities that could destabilize the restructuring system.
Samir D. Parikh is Professor of Law at Lewis & Clark Law School.