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Use of formal insolvency procedure and judicial efficiency in Spain

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Abstract

In the framework of law and finance literature, this study focuses on analysing the impact of judicial efficiency in firms’ decision on the use of court proceedings in the resolution of financial distress. The question as to whether the use of formal bankruptcy procedures can be related to efficiency in the implementation of legislation by the courts has been posed. The scarce empirical evidence has focused on the analysis of the impact of judicial efficiency at the international level, which implies assumption that the degree of efficiency is similar within each country. However, studies from Brazil and Spain have revealed the existence of differences among districts within the same country and its impact on different economic and financial aspects. Consequently, the work focuses on a single country allowing to isolate the effect of the content of the legislation from the efficiency of the application of these legal rules by the courts. The sample consists of 4160 unlisted firms in Spain experiencing financial difficulties, among which are companies that have and have not opted to use the formal bankruptcy proceedings. The results indicate that firms located in Spain’s autonomous communities that exhibit a higher efficiency of their judicial systems are more likely to use court proceedings to resolve financial distress.

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Fig. 1

Source: Own elaboration based on LC

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Notes

  1. At the same time also indicated the institutional impact, stating that the use of the one procedure rather than the other depends on the institutional structure or legal origin (Hart 2000).

  2. Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chances, and measures to increase the efficiency of restructuring, insolvency, and discharge procedures and amending Directive 2012/30/EU. The proposal is currently at the stage of ordinary legislative procedure. A draft reading of it took place on 21 August 2018.

    http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf.

  3. Research initiated by La Porta et al. (1997) with the publication of the influential paper “Law and Finance” focused on the protection of corporate shareholders and creditors provided by legal rules. This publication has been an important step in the literature because previous research has not distinguished between socialist and non-socialist systems, combining legal and financial aspects.

  4. However, the changes made to the British law in recent years are approaching the US Chapter 11 model geared towards reorganisation.

  5. Generally, in literature on bankruptcy, countries can be classified into two main groups: geared towards the protection of the debtor, as in the case of the United States, and aimed at the protection of creditors, as in the United Kingdom. However, there are also laws at an intermediate level, which address a combination of both, as in Germany.

  6. For example, an early composition agreement that allows to pause obligation to file for insolvency.

  7. If insolvency is not requested in the time indicated by the law, it is presumed to be debtor’s fault. This situation may result in classification of insolvency as fraudulent (concurso culpable, Art. 165 LC). Other causes for classification of insolvency as fraudulent are addressed in Art. 164 of the LC.

  8. According to Organic Law 6/1985 of 1 July on the Judiciary, the State is organized territorially into municipalities, provinces, and autonomous communities. Furthermore, there are different types of courts and tribunals that determine the existence of four jurisdictions: civil, criminal, administrative, and social. Before the LC entered into force, issues related to insolvency were dealt with in the civil law courts. In relation to the Commercial Courts, see Art. 2 of Organic Law 8/2003 of 9 July on Bankruptcy Reform amending the Organic Law 6/1985 of 1 July on the Judicial Power.

  9. In this paper, the terms ‘out-of-court workout/agreement’, ‘workout’, and ‘informal proceeding’ will be used as synonyms and refer to the contractual agreements between the debtor and its creditors without court intervention.

  10. This database contains the status (active, in the bankruptcy procedure) and date of change of status. This information allows for the determination of the firms that file for formal proceedings within a certain period. However, the SABI database is updated in such a way that it loses the historical information. Therefore, search was conducted at the beginning of 2015 to obtain information relating to 2014. It is likely that many companies, which entered into bankruptcy procedure in the years prior to 2014, have changed their status in 2015. Therefore, it was decided to focus only on 2014.

  11. At the beginning of 2015, when the list was extracted from SABI database, there were 4.852 firms in bankruptcy. When cross-checking this list with those obtained in previous years, it was detected that 433 firms filed in bankruptcy in previous years, so they were eliminated.

  12. The calculation of the Altman (2000) is explained in Sect. 4.2.

  13. Companies whose insolvency probability is not clear cannot be considered as financially healthy firms and are classified in the Altman’s bankruptcy prediction models under the “grey zone” (1.1 < Z < 2.6).

  14. For this check, the list obtained was cross-checked with the list of companies that are in bankruptcy in 2015, 2016 and 2017 extracted from SABI in each year.

  15. The approach is similar to that used in the studies on prediction of business failure, which usually consider a matched sample. One is composed of all insolvent firms and a control sample that includes the same number of observations with a similar size and sector (García-Gallego and Mures-Quintana 2013).

  16. CNAE is the acronym of National Classification of Economics Activities in Spain. According to CNAE each activity is associated with 4 digits. For example, CNAE 4724 corresponds to trade (4), retail (47), food products (472), bread and bakery products (4724).

  17. Reports published by the European Commission providing an overview and indicators of the efficiency, quality, and independence of justice in the European Union member states.

  18. As indicated, companies with financial problems frequently do not fulfil reporting requirements in the year preceding filing for bankruptcy. However, as a robustness check, the model is estimated considering only companies with information available for the year preceding the procedure.

  19. Because the explanatory variables show low inter-annual variability, the estimation by fixed effects regression model is not appropriate. For this reason we decided to estimate the models using random effects.

  20. The computation of marginal effects considering one standard deviation change was obtained by multiplying a unit change marginal effect for the judicial efficiency rate in a given model (Table 5) by the standard deviation of the rate in question provided in the Table 3.

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    Ewelina Mruk, Inmaculada Aguiar-Díaz & Maria Victoria Ruiz-Mallorquí

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Appendix

Appendix

See Tables 8 and 9.

Table 8 Variables description
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Table 9 Distribution of sample by autonomous community and judicial efficiency proxies.
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Mruk, E., Aguiar-Díaz, I. & Ruiz-Mallorquí, M.V. Use of formal insolvency procedure and judicial efficiency in Spain. Eur J Law Econ 47, 435–470 (2019). https://doi.org/10.1007/s10657-019-09621-w

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