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Leaving the Shadows of US Bankruptcy Law: A Proposal to Divide the Realms of Insolvency and Restructuring Law


Insolvency law used to be a set of rules that govern the way a debtor is treated once he became insolvent and stopped trading. Certain mechanisms respond to this incident in order to safeguard a fair treatment of all creditors and other stakeholders with the aim of minimizing the damage. Modern insolvency laws do more. They have been endowed with tools that shall allow for a restructuring of the business of the failing debtor, often combining the common tools of insolvency law, e.g. a collective stay, with new tools to facilitate a restructuring agreement. But why wait until a debtor is insolvent? The idea of early redress to a business failure has led to a number of legislative pre-insolvency initiatives that make such tools available to debtors that are not yet insolvent. The result is a mixture of insolvency and restructuring law that has grown guided by practical needs rather than doctrinal approaches. In this paper, a doctrinal approach is proposed that offers a clear distinction between insolvency and restructuring law. Based on the description of the debt cancellation effect as the common function of all insolvency and restructuring proceedings, the different mechanisms that both types of procedures use lead to a clear categorization of insolvency and restructuring proceedings and their governing law and principles.

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  1. 1.

    Insolvency law is the law related to the insolvency of a debtor; see Goode (2011), para. 1-01. This terminology is not commonly accepted around the world of course. In American law, for instance, the term ‘insolvency’ only describes the state of the debtor being insolvent, while the term ‘bankruptcy’ is used for the legal process of handling an insolvent debtor (enacted in the Bankruptcy Code); see e.g. Jackson (1986), p 197. This paper intends to demonstrate that the term ‘insolvency law’ is more adequate.

  2. 2.

    The term ‘restructuring’ is used in this paper in a rather narrow sense, encompassing only measures that allow the legal entity of the debtor to survive or avoid an insolvency process. It does not include a transfer of the business from the debtor to another legal entity (as a going concern sale).

  3. 3.

    Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (EIR 2015) [2015] OJ L141/19-72, Art. 1(1).

  4. 4.

    Eidenmüller (2016), p 13.

  5. 5.

    See the proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, published on 22 November 2016, COM(2016) 723 final.

  6. 6.

    CJEU 22 June 2017, C-126/16 Federatie Nederlandse Vakvereniging v. Smallsteps BV, EU:C:2017:489, paras. 48–51. The court adopted the Opinion of Advocate General Mengozzi, 29 March 2017, EU:C:2017:241, paras. 77–84.

  7. 7.

    Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses [2001] OJ L82/16–20.

  8. 8.

    See Häsemeyer (2007), para. 2.01: ‘insolvenzrechtliche Haftungsordnung als eine Friedensordnung’. See also the ‘procedure theory’ of Mooney (2004), pp 956 et seq.

  9. 9.

    See Flessner (2010), p 143.

  10. 10.

    Paterson (2014), p 4.

  11. 11.

    See Madaus (2017), p 14.

  12. 12.

    See Stiglitz and Heymann (2014), p 18: ‘Debt servicing difficulties are handled routinely by private renegotiations or formal bankruptcy procedures […] without causing more than low intensity “background noises” for the system as a whole.’

  13. 13.

    Most prominently, David Graeber overlooked the debt servicing effect in his insightful book on debt; see Graeber (2011), p 383.

  14. 14.

    See the explanatory memorandum of the Directive proposal of 22 November 2016 (n. 5), COM(2016) 723 final, pp 5–6.

  15. 15.

    See e.g. Jackson (1986), p 14.

  16. 16.

    In an ideal world, Pareto efficiency would be achievable; see Eidenmüller (2005), p 535. In our real world, such a concept is of limited use; see Mokal (2008), p 21.

  17. 17.

    This is the foundation of the ‘Creditors’ Bargain Theory’ developed by Thomas H. Jackson; see Jackson (1982, 1986); see also Baird and Jackson (1984), pp 100–101.

  18. 18.

    The moral aspect of debt was highlighted by Paulus (2009), pp 1150–1151. See also Graeber (2011), p 121.

  19. 19.

    This point was already made by Flessner (1994), pp 25–26.

  20. 20.

    Baird (2017), p 792.

  21. 21.

    See again the convincing illustration by Baird (2017), pp 789–792.

  22. 22.

    See the argument made by Eidenmüller (2016), p 13.

  23. 23.

    This is exactly what the Commission proposed for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, published on 22 November 2016, COM(2016) 723 final; see Art. 11(1)(c), 2(10), and Recital 28.

  24. 24.

    Jackson (1982), p 861. For further references, see above n. 17.

  25. 25.

    While the theory advanced by Jackson is able to underline the need for a collective procedure for insolvent debtors, prominent academics have convincingly challenged further conclusion based on this theory, e.g. on the (sole) purpose of any insolvency law, including restructuring law, or on the way to design the distribution of control rights and proceeds in an insolvency framework; see Warren (1987); Mokal (2008), pp 32–60; Goode (2011), paras. 2–16 to 2–19.

  26. 26.

    The efficiency of any auction-based mechanism rests, however, on the assumption that a functional market with solvent market participants exists at any time. History shows that this may not be the case, e.g. in time of a credit crunch following a financial crisis or during a long recession. Here, a liquidation must either be postponed or be replaced by other means—for non-cash auctions, see e.g. Hausch and Ramachandran (2009). Market failure may also occur where the debtors’ firm is too large to attract even one bidder and artificial bidding procedure may lead to controversial results, see e.g. the practice of Equity Receiverships for US railroad companies (see e.g. Lubben (2004)) or the sale of Chrysler and GM during the financial crisis (see e.g. Adler (2010)).

  27. 27.

    Jackson (1986), p 40.

  28. 28.

    Ibid., p 212; see also Baird (1986), p 128.

  29. 29.

    See Jackson (1986), pp 210 and 212; also see Baird (1986), p 127.

  30. 30.

    This is undisputed, for instance, under German law, see Gottwald (2010), § 63, para. 10.

  31. 31.

    See German Code for Civil Procedure s. 894. Such a strict enforcement may not be common in all jurisdictions. Some may only allow for damages, but not for a compulsive contract. Nevertheless, the idea of compulsive contracts is transferable.

  32. 32.

    See the decision of the German Federal Supreme Civil Court in BGH MDR 1952, 155. For further details on compulsive contracts under German law: Busche (1999).

  33. 33.

    In this sense Madaus (2011), pp 261 et seq.

  34. 34.

    The ‘cessio bonorum’, predecessor of all compositions, originates from Roman contract law (D.2.14 De pactis), but even a ‘cessio bonorum’, the transfer of all the debtor’s assets to his creditors (see CJ.7.71), could only save the debtor from the effects of infamy, but did not provide a debt relief (see Ulp.

  35. 35.

    See De Ruysscher (2017), pp 29–35; in German: Kohler (1891), pp 446 et seq., for examples from local law in medieval Italian, Spanish or Dutch law. There is a comprehensive body of research on credit networks and relationships in Europe; see e.g. Clemens (2008) (with many references to English and French research papers).

  36. 36.

    See Garrido (2013), p 116.

  37. 37.

    Another option for the debtor to keep the business despite a liquidation process is to set up a new company (on his own or together with other investors, often insiders like secured creditors) and buy the business in the auction process. Such ‘NewCo’ solutions are frequently used in corporate insolvencies and have been prone to discriminate unsecured creditors; see e.g. Lubben (2004) for former US Equity Receiverships, or the current discussion about ‘phoenix companies’ in pre-pack sales; see e.g. Smits (2016). From a procedural perspective, such sales use an asset sale in a liquidation procedure to shift a business to a new legal entity.

  38. 38.

    Legally the debtor is still the owner of the business, but the creditors of an insolvent debtor are entitled to liquidate all assets of the debtor including the business which makes them the ‘owners’ of the business in an economic sense.

  39. 39.

    See the ‘Contract Clause’ in Art. I, s. 10, cl. 1: ‘No State shall […] pass any […] Law impairing the Obligation of Contracts […].’.

  40. 40.

    ‘The Congress shall have Power To […] establish […] uniform Laws on the subject of Bankruptcies throughout the United States […]’.

  41. 41.

    A permanent federal bankruptcy law has only existed since the Bankruptcy Act of 1898 which led to earlier Supreme Court decisions on the power of states to legislate bankruptcy law in the absence of federal law; see Sturges v. Crowninshield, 17 US (4 Wheat.) 122 (1819), and Ogden v. Saunders, 25 US (12 Wheat.) 213 (1827).

  42. 42.

    See the proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, published on 22 November 2016, COM(2016) 723 final.

  43. 43.

    Under the restrictions of US-like constitutional provisions, the natural idea of understanding a restructuring as a form of contract that is not dominated by liquidation principles requires a different approach. A prominent example can be found in the Team Production Theory for corporate debtors; see LoPucki (2004). Here, contractual principles shall prevail liquidation principles based on a corporate law approach. For recent support, see Kammel (2013).

  44. 44.

    See Zimmermann (1990), p 579.

  45. 45.

    Chung (2017), pp 111–112.

  46. 46.

    Pulgar (2014), pp 533–536.

  47. 47.

    For the new French civil law rule, see Ottaway and Harang (2016).

  48. 48.

    Paulus (2016).

  49. 49.

    Introduced by Hart (1988), p 121.

  50. 50.

    Ibid., p 123. The incomplete contract paradigm is no longer restricted to the theory of the firm. It has been applied to other economic topics, see Schmitz (2001).

  51. 51.

    See e.g. Finch (2012).

  52. 52.

    See e.g. Carpus Carcea et al. (2015), p 4; also Garrido (2012), paras. 1 and 93; Hess (2013); or Olivares-Caminal (2015), paras. 1.08 and 1.43.

  53. 53.

    See e.g. Burdette and Omar (2017), p 229.

  54. 54.

    Paterson (2014), pp 4 and 15.

  55. 55.

    Ibid., pp 4 and 16.

  56. 56.

    Ibid., pp 4 and 16.

  57. 57.

    Separating the effects of insolvency and restructuring law in a unified legal framework, as done by Couwenberg and Lubben (2015) for Chapter 11 of the US Bankruptcy Code, illustrates nicely that there are two different legal systems at work with insolvency law being the ‘essential’ one for a default handling of insolvent corporations.

  58. 58.

    Eidenmüller (2016), pp 12–15.

  59. 59.

    Balz (2017), p 76.

  60. 60.

    The common pool problem and the resulting tragedy of commons is a common phenomenon beyond the field of insolvency, see e.g. Hardin (1968). It is often illustrated by the unrestricted right of fishermen to fish in a lake; see e.g. Jackson (1986), p 11.

  61. 61.

    This was already pointed out by de Weijs (2013), p 213; later also Schillig (2014), p 8.

  62. 62.

    See Heller (1998); Fennel (2009).

  63. 63.

    Heller (1998), pp 622–623.

  64. 64.

    For further details, see Heller (1998), pp 633–639.

  65. 65.

    See again de Weijs (2013), p 213.

  66. 66.

    Heller (1998), p 640; also Schillig (2014), pp 12–13. Interestingly, economic contract theory also suggests that holdup problems and opportunistic behavior in the renegotiations of incomplete contracts should also be addressed by concentrating ownership; see Hart and Moore (1990), p 1121.

  67. 67.

    Code de Commerce Art. L626-29. Also see Kastrinou (2016), p 108.

  68. 68.

    See s. 5(3) of the Debt Cancellation Law of 1938 [Gesetz über die Bereinigung alter Schulden vom 17.8.1938, RGBl. I 1938, 1033—im Anwendungsbereich erweitert durch RGBL. I 1940, 1209]. See also s. 6(1) of the War Hardship Ordinance of 1939 [Verordnung über das Kriegsausgleichverfahren vom 30.11.1939, RGBl. I 1939, 2338], and s. 16(2) of the Contract Support Ordinance of 1939 [Vertragshilfeverordnung vom 30.11.1939, RGBl. I 1939, 2329].

  69. 69.

    For further details and references, see Madaus (2014).

  70. 70.

    For instance, the bondholder representative is, where appointed, the only person voting on a insolvency plan for all bondholders under the German Bond Act s. 19(3).

  71. 71.

    See most prominently Jackson (1986), p 10; Eidenmüller (1999), p 19.

  72. 72.

    For a general introduction to the prisoner’s dilemma, see Rapoport and Chammah (1965).

  73. 73.

    Jackson (1982), p 862.

  74. 74.

    If a restructuring offers the best result for all participants compared to all other ways to handle the business situation, you may find a Pareto-efficient solution. In practice, however, such solutions are rare to find, especially if it involved a large group of people, and requiring such a solution for the application of legal means may not work for that very reason. For a sceptical view on concepts of efficiency see Mokal (2008), pp 20–26.

  75. 75.

    For further details, see Andreoni (1988), Fischbacher et al. (2001), Gunnthorsdottir et al. (2007).

  76. 76.

    This was already observed by de Weijs (2013), p 214. See also—more general—Fennel (2009), p 15.

  77. 77.

    For an insightful discussion on the merits of the principle to respect pre-bankruptcy entitlements, see Goode (2011), paras. 2–15 to 2–19.

  78. 78.

    See e.g. Art. 1 of Protocol No. 1 to the European Convention on Human Rights.

  79. 79.

    See e.g. Recitals 5, 73, 111 of the Bank Recovery and Resolution Directive (Directive 2014/59/EU of 15 May 2014 [2014] OJ L173/190); see also Malek and Bousfield (2016).

  80. 80.

    Using the value of a claim in the distressed debt or band market would also allow to bind a party who bought a claim or bond there to the value it agreed to pay. Thus, a distressed debt investor would only be entitled to claim value on behalf of the acquired claim up to the amount of the purchase price he paid, but not the nominal value.

  81. 81.

    Even beyond the background of an insolvency liquidation, valuation will often need to account for the going concern value of the debtor’s business instead of the value generated in a piecemeal liquidation, see Crystal and Mokal (2006), pp 126 et seq.

  82. 82.

    This principle was established in Roman law, see C.7.60.1.

  83. 83.

    See above, n. 7.

  84. 84.

    Preventing a redistribution of value is widely seen as a benchmark for an efficient restructuring law; for a critical assessment see Casey (2016).

  85. 85.

    See s. 237(2) German Insolvency Code or s. 1126(f) US Bankruptcy Code.

  86. 86.

    See e.g. s. 169 German Courts Constitution Act.

  87. 87.

    Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses [2001] OJ L 82/16-20.

  88. 88.

    See Opinion of Advocate General Mengozzi, 29 March 2017, Case C-126/16, EU:C:2017:241, paras. 77-84, and the subsequent CJEU judgment in the case, 22 June 2017, Federatie Nederlandse Vakvereniging v. Smallsteps BV, EU:C:2017:489, paras. 47–52.

  89. 89.

    See paras. 41, 45.

  90. 90.

    The similar question of defining ‘insolvency proceedings’ arises when we look at Art. 6(1) of the recast European Insolvency Regulation that provides international jurisdiction for ‘insolvency-related claims’ to the courts of the COMI state and defines such claims as an action that ‘derives directly from the insolvency proceedings and is closely linked with them’.

  91. 91.

    Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings [2000] OJ L160/1.

  92. 92.

    Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast) [2015] OJ L141/19.

  93. 93.

    See Art. 2(1).

  94. 94.

    Recital 10 explains that this is the explicit will of the European legislator. Only non-public proceedings remain excluded.

  95. 95.

    The name refers to the case of Antony Gibbs & Sons v. Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

  96. 96.

    Bakhshiyeva v. Sberbank of Russia & Ors [2018] EWHC 59 (Ch) (18 January 2018) at 47.

  97. 97.

    Ramesh (2017), p 43.

  98. 98.

    Such an approach would differ from the one preferred by Manfred Balz who suggested a partial application of the European Insolvency Regulation (rules on jurisdiction and recognition) to his Type B restructuring proceedings; see Balz (2017), pp 97–98.

  99. 99.

    See the High Court judgments in Magyar Telecom B.V. [2013] EWHC 3800 (Ch) 21; Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch) 87. See also Payne (2013); for a detailed discussion in German see Kranz (2017), pp 275–317.


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Madaus, S. Leaving the Shadows of US Bankruptcy Law: A Proposal to Divide the Realms of Insolvency and Restructuring Law. Eur Bus Org Law Rev 19, 615–647 (2018).

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  • Insolvency
  • Restructuring
  • Common pool
  • Debt
  • Debt cancellation
  • Hardship
  • Anticommons
  • Contractual approach
  • Contract
  • Workout
  • Judicial assistance