Faculty of law blogs / UNIVERSITY OF OXFORD

The Flip Side of the Coin: How Entrepreneurship-Oriented Insolvency Laws Can Complicate Access to Debt Financing for Growth Firms


Time to read

3 Minutes


Maren Forier
PhD student, Faculty of Business Economics, UHasselt
Nadine Lybaert
Professor, Faculty of Business Economics, UHasselt
Maarten Corten
Professor, Faculty of Business Economics, UHasselt
Niels Appermont
Professor, Faculty of Law, UHasselt
Tensie Steijvers
Professor, Faculty of Business Economics, UHasselt

Policymakers strive to create legislation that promotes entrepreneurship, as it influences individuals' propensity to start new ventures. While existing research extensively covers the effects of tax and interest policies on entrepreneurship, the impact of insolvency laws remains underexplored in law and economics literature. In our paper titled ‘The flip side of the coin: how entrepreneurship-oriented insolvency laws can complicate access to debt financing for growth firms’, we investigate the shifts in the use of debt for growth firms as a result of the recent entrepreneurship-oriented reforms in Belgian insolvency and company law from 2017 to 2019 (eg, easier access to debt remission for natural persons, the new rule for demarcation of the assets of the bankruptcy estate from Art. XX.110, § 3, and the ‘cheaper’ form of limited liability due to the introduction of the BV without a strict legal [minimum] capital).

What research tells us, and doesn’t tell us 

The overall objective of transitioning towards a more debtor-friendly insolvency law is to stimulate entrepreneurship. Numerous studies have indicated a positive correlation between such laws and entrepreneurship rates, assessing changes in self-employment or firm-formation rates. However, this shift not only impacts debtors (entrepreneurs) but also significantly influences the behaviour of creditors. The move towards debtor-friendly laws may create a less favourable environment for creditors, increasing their risk and complicating debt recovery in the event of a debtor’s bankruptcy. More specifically, as the legal landscape changes to favour debtors, creditors may face challenges in recovering debts, leading to increased caution in extending credit to entrepreneurs. This risk-averse behaviour has been evidenced in cross-country studies, highlighting the impact of forgiving bankruptcy laws on both debtors and creditors.

To thoroughly evaluate the effectiveness of the new Belgian insolvency law, two key questions are addressed:

Firstly, how does the shift towards a debtor-friendly insolvency law affect the debt financing of Belgian growth firms? We focus on 25,284 Belgian growth firms since, given the higher perceived riskiness of these firms, it is likely that growth firms will mainly have to bear the consequences of creditors having become more cautious when extending credit after the change in the law.

Secondly, will all creditors adjust their behaviour uniformly in response to the law change? In general, there are four main groups of creditors: banks, trade creditors, employees (eg, unpaid wages), and the government (eg, unpaid taxes). It is rather unlikely that the government and employees will finance growth since there is little room for negotiation to increase these debt levels. Therefore, to finance growth, a firm will most likely go to banks and trade creditors.

The different responses of banks and trade creditors

How creditors react to law changes may significantly differ among the types of creditors. Banks, termed ‘adjusting creditors’, are expected to be more hesitant in providing debt financing to growth firms following the law change, since these creditors possess the resources, expertise, and bargaining power to manage and mitigate default risks. Conversely, trade creditors, termed ‘non-adjusting creditors’, are expected to exhibit less strictness in modifying credit terms since their smaller scale of operation and established customer relationships make it less justifiable for them to incur significant transaction costs.

The study's findings confirm these expectations, revealing that higher growth firms experience difficulties in obtaining credit from financial institutions after the law changes. However, surprisingly, trade creditors also become stricter towards growth firms in this new legal environment. This raises the crucial question of whether growth firms turn to alternative sources for debt financing. Exploration of the government and employees as a residual category unveils a concerning trend, with growth firms delaying payments to these entities, essentially ‘forcing’ financing from them due to insufficient support from traditional creditors.

What can we learn from these results?

The shift towards a more debtor-friendly insolvency law, while intended to directly foster entrepreneurship, may also have an adverse indirect effect on entrepreneurship, namely by constraining debt financing for growth firms. The economic analysis of these debtor-friendly shifts highlights the necessity to weigh both positive and negative effects. While such laws better protect struggling firms with regard to restructuring and job preservation and, therefore, foster entrepreneurship, they could simultaneously restrict debt financing for growth firms and hinder entrepreneurship, innovation, and overall investment. As more and more nations are moving towards a more debtor–friendly legislation, Belgium’s experiences thus offer valuable insights for broader discussions, emphasizing the essential balance between debtor protection and facilitating access to debt financing for sustainable economic growth and resilience.

Maren Forier is PhD student, Faculty of Business Economics, UHasselt

Nadine Lybaert is Professor, Faculty of Business Economics, UHasselt

Maarten Corten is Professor, Faculty of Business Economics, UHasselt

Niels Appermont is Professor, Faculty of Law, UHasselt

Tensie Steijvers is Professor, Faculty of Business Economics, UHasselt


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