Corporate Restructuring Laws Under Stress
This post launches a new series on the Oxford Business Law Blog, linked to a forthcoming special issue of the European Business Organization Law Review. The special issue features a combination of country-level papers and cross-country papers, all directed to interrogating how corporate restructuring laws were used and/or reformed during the pandemic period, with a view to informing the design of policy responses to mass insolvency risk in future crises. It is very clear from these papers, each of which will be featured in the OBLB series, that there is much to learn from pandemic experiments – both in relation to the design of alternatives to the application of pre-crisis restructuring laws to crisis-affected firms, and in approaches to reforming such laws in-crisis.
Early in the Covid-19 pandemic, we wrote a theoretical paper endorsing the early decision of policymakers to try to keep businesses in adversely affected sectors out of the formal insolvency regime (even where that regime included a well-functioning restructuring procedure), and explored how extraordinary bail-outs (transfers from the state to private debtors) and/or extraordinary bail-ins (state orders cutting down the entitlement of the creditors of private debtors) could be deployed to enable businesses to exit from a period of trading shutdown in the same financial condition as on entry. The target of such extraordinary measures would be a debtor’s fixed liabilities during the period of trading shutdown: it was these liabilities that risked pushing a previously solvent debtor into financial distress, with all its associated costs. No public policy response could recover the revenue lost during a period of trading shutdown; the case for a public policy response lay in minimising the amplification of the shock that would otherwise flow from inflicting the additional costs of financial distress on businesses in adversely affected sectors.
Whilst there was considerable variation in the design of the extraordinary policy response to the risk of widespread Covid-19-related business distress, some patterns have been observed (Ebeke et al 2021; Aiyar et al 2021; see further our introduction to the special issue here). These suggest that the European policy response fell short of enabling a debtor to exit a period of trading shutdown in the same financial condition as on entry. Whilst some bail-outs were structured as grants, many others were structured as loans, often backed by state guarantees. And many states appear to have experimented with bail-ins in the form of extraordinary moratoria, restricting one or more classes of creditor from enforcing for a specified period. Whilst the distributional consequences of these two measures (bail-outs by way of loan v. bail-ins by way of moratoria) are plainly very different, their effect on the debtor is similar, namely to defer (rather than discharge the debtor from) fixed liabilities. That is plainly the effect of an extraordinary moratorium, but it is also the result of a bail-out by way of loan, which in substance enables the borrower to convert short-term liabilities into a longer-term one.
In this sense, some need for later corporate restructuring was ‘baked in’ to the European policy response from the outset. A short period of disruption, coupled with a ‘V-shaped recovery’, would have helped to minimise this need. (In the UK, policymakers explaining the decision to offer a generous package of state-backed loans to businesses made explicit their expectation that the disruption, while potentially ‘large’, would be ‘temporary’.) As it was, the disruption was protracted, and the recovery ‘uneven’, even before businesses were required to grapple with new economic challenges flowing from Russia’s invasion of Ukraine. An increase in corporate defaults is generally expected, and, as the European Central Bank has emphasised, governments do not now enjoy the same ‘fiscal space’ to extend bail-outs that might have appeared available early in the pandemic. If businesses are to remain in the hands of existing owners, some restructuring will be required. A failure to treat debt overhang problems could have significant adverse implications for financial stability at a time when there are also other non-trivial risks to stability in the European banking system.
Are national corporate restructuring laws up to the task? We have observed many jurisdictions experimenting with restructuring law reform during the pandemic period. In the EU, the pandemic coincided with the period afforded to Member States for the transposition of the European Restructuring Directive into national law, so some restructuring-related law reform was already expected. Pursuing such reforms during a period of crisis, however, generates the risk that the content of reforming legislation will be distorted by the peculiar features of the crisis, producing law that tends to deter rather than facilitate investment in the post-crisis period (van Zwieten, Eidenmueller and Sussman 2021). As Ignacio Tirado puts it in his paper in the special issue, ‘emergency drafting is… a direct enemy of good technical drafting’.
Overall, a mixed picture emerges from the country level papers in relation to the success of attempts at in-crisis restructuring law reform. For some authors, the crisis presented an opportunity to drive permanent reforms across the line that might not otherwise have been achieved. Others are more sceptical, regretting ways in which reforming legislation tended to entrench previous problematic features of the law, and bemoaning missed opportunities for improvement. All identify some areas of persisting difficulty or weakness in the permanent law. Authors also offer important lessons in relation to the design of temporary restructuring procedures, which some jurisdictions also experimented with. There are points of disagreement between authors on the wider question, raised by such experiments, of the role of restructuring procedures in a Covid-19-like crisis. Not all share our view that, at least at the outset of the crisis, the role for such procedures ought to have been a very limited one.
Many authors in the series express concerns about Covid-19 bail-out design. Several note how the presence of state-guaranteed loans complicates the achievement of restructurings; more generally, there are concerns about whether bail-outs were appropriately designed to go no further than necessary to achieve policymakers’ goals. We share these concerns, and in other work we are exploring more granular aspects of bail-out design, and the feasibility of alternatives to bail-outs. In the meantime, we hope that the contents of this OBLB series and the associated special issue will provide fresh impetus for further scholarly work on the design of Covid-19 and energy crisis business relief policies. This work could not be more important, in particular for younger generations, who must be prepared for future tax policy to allocate the costs of relief administered between 2020 and 2022 to them.
Kristin van Zwieten is Clifford Chance Professor of Law and Finance in the Law Faculty and the Gullifer Fellow at Harris Manchester College.
Horst Eidenmüller is Statutory Professor for Commercial Law in the Law Faculty.
Oren Sussman is Emeritus Reader at the Saïd Business School.
The authors gratefully acknowledge funding from the Covid-19 Research Response Fund at the University of Oxford, and from the Oxford Law Faculty, in connection with this project.
OBLB series are available here.
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