Viability Assessment in Corporate Debt Restructuring: Optimizing the Filtration Effect of the European Directive on Restructuring and Insolvency

Despite being pivotal in corporate debt restructuring, viability, an intricate notion with double meaning and double role, has not been systematically examined in Europe. Against this background, and especially given that the new European directive on restructuring and insolvency (the ‘Directive’) is currently under transposition and restructuring law is making its first steps as a harmonised field across Europe, my recent paper, published in Norton Journal of Bankruptcy Law and Practice, undertakes a doctrinal, comparative (USA, UK) and economic analysis of law examination of viability, with the aim of putting forward suggestions that will make viability the linchpin of the Directive, thus optimising its filtration effect, as defined below.

In doing so, the paper first analyses and distinguishes the two different meanings of viability, namely financial viability and economic viability, and clarifies what the precise role of law is within the viability-related discourse. Such role consists in providing indicators of viability and incorporating appropriate ‘filtering mechanisms’, a term of art introduced by the paper, which refers to mechanisms filtering non-viable debtors out of the restructuring procedure, hence contributing towards the satisfaction of restructuring’s overall goal of saving viable debtors only.

The way in which such filtering mechanisms are triggered depends on who plays the role of the ‘ultimate viability assessor’ within a restructuring framework, for example an Insolvency Practitioner (‘IP’) or a court. Depending on this, the paper distinguishes between IP–centred and Non–IP – centred models of viability assessment and identifies the Directive as standing closer to the Non–IP – centred one.

What the paper suggests though, is that what ultimately matters is the appropriateness of filtering mechanisms in any chosen model of viability assessment. Such mechanisms can be most characteristically found under Chapter 11, Title 11 of the US Bankruptcy Code and are the conversion/dismissal of a Chapter 11 case and stay relief under section 362. The paper examines them extensively and demonstrates how the existence/inexistence of viability in its double meaning, constitutes the ‘litmus test’ for the triggering of Chapter 11’s filtering mechanisms.

In light of these comparative findings, the paper finally turns to the Directive and identifies its filtering mechanisms. The paper subsequently makes suggestions on how the filtration effect of the Directive’s existing mechanisms can be optimised through appropriate interpretation, transposition, judicial practice, or future reform. Through these suggestions, it is aspired that first, the Directive will properly reflect the notion of viability and consequently achieve an effective filtering of viable debtors from non–viable ones, and second, viability will ultimately become the primary point of focus and linchpin of European corporate debt restructuring overall.

The paper was awarded the 2021 Silver Medal in the International Insolvency Institute’s ‘Prize in International Insolvency Studies’.

This post was first published in the Harvard Law School Bankruptcy Roundtable and the article can be downloaded here (reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 30 No. 5 (October 2021), with permission of Thomson Reuters).

Lydia Tsioli is a PhD in Law Candidate at King’s College London.