The proceedings of this special issue were written at a perilous moment for governments in Europe. These governments had responded ‘decisively’ to the risk that Covid-19-related trading shutdowns would lead to mass business insolvencies.Footnote 1 That risk was not confined to leveraged businesses: in the absence of revenue, fixed operational liabilities could also push other businesses into insolvency once cash reserves were exhausted.Footnote 2 States moved with extraordinary speed to suspend pre-pandemic rules of insolvency law that might otherwise have required a newly distressed debtor to file for the commencement of a collective insolvency procedure, and to restrict creditors’ ability to compel the commencement of such proceedings on grounds of insolvency.Footnote 3 The underlying economic problem—fixed liabilities (financial and/or operational) and, at least for some sectors, a sudden loss of revenue—was then treated through some combination of bail-outs (transfers from the state to private debtors) and bail-ins (state orders cutting down on the entitlements of creditors of private debtors).Footnote 4

Whilst there was considerable variation in the design of this relief package across jurisdictions, some patterns have been observed.Footnote 5 Some bail-outs were structured as grants (that is, as non-repayable), but many others were structured as loans, often supported by state guarantees: new loans, backed by the state, were ‘one of the main instruments employed by European countries’.Footnote 6 The other form of relief reported to be commonly offered, albeit with differing intensity across countries,Footnote 7 was the imposition of new moratoria, preventing creditors or some class of creditor (for example, landlords) from recovering arrears for the prescribed period. This is a form of bail-in, but only of a limited kind, since the underlying obligation remains on the debtor’s balance sheet: in other words, such moratoria only produce an extension in maturity. Bail-outs by way of loan have a similar effect (on the debtor: plainly, the cost of delivering relief is allocated differently as between a bail-out and a bail-in) in that they enable the debtor to meet current fixed costs through borrowing, in effect swapping shorter-term liabilities with a longer-term liability. The critical point for present purposes is that relief delivered through bail-outs by way of loan, and/or bail-ins by way of new moratoria, would have been unlikely to enable beneficiary debtors to exit from a period of trading shutdown in the same financial condition as on entry:Footnote 8 if trading disruption was prolonged, affected debtors could generally be expected to exit more indebted than they were on entry.Footnote 9

In this sense, some need for later restructuring was built into the Covid-19 policy response wherever governments offered relief by way of loan, and/or new moratoria, rather than by way of non-repayable grant.Footnote 10 A short period of trading disruption, coupled with a ‘V-shaped recovery’, would have helped to minimise this; as it was, however, Covid-19-related trading disruptions were prolonged, and the recovery was ‘uneven’Footnote 11 even before a new shock was inflicted on commodity markets when Russia invaded Ukraine. A significant increase in corporate defaults is now generally expected across Europe, which governments must manage without the same ‘fiscal space’ that they had at the onset of the pandemic, as the European Central Bank has repeatedly emphasised.Footnote 12 If businesses are to remain in the hands of current owners during the downturn, restructurings will be required. A failure to effectively address debt overhang problems could have significant adverse implications for financial stability.Footnote 13

Are national corporate restructuring laws up to the task? We have observed many jurisdictions experimenting with restructuring law reform in recent years, including during the pandemic. In Europe, the pandemic coincided with the period afforded to Member States for the transposition of the Restructuring Directive,Footnote 14 so some reforms were already expected. It is, however, important to interrogate whether restructuring law reform undertaken in a period of emergency is optimally calibrated for the treatment of financial distress once that emergency subsides:Footnote 15 as Ignacio Tirado puts it in his paper in this special issue, ‘emergency drafting is … a direct enemy of good technical drafting’.Footnote 16 We have also observed permanent reforms being undertaken in jurisdictions outside of the EU, including in the UK, where the Corporate Insolvency and Governance Act 2020 (enacted three months into the pandemic) made very significant changes to pre-pandemic corporate restructuring law. Finally, we observed governments experimenting with the introduction of temporary restructuring procedures, and/or with temporary modifications to other parts of insolvency law with a view to facilitating out-of-court workouts. Such experiments raise important questions about the role and limits of restructuring law in a crisis.

With these questions in mind, we asked experts from Italy, Spain, Germany, the Czech Republic, Switzerland and the United Kingdom to reflect on the way in which restructuring laws were used and (to the extent applicable) reformed in their jurisdiction during the pandemic, on expected routes to restructuring as pandemic support was withdrawn and businesses grappled with the onset of new economic challenges associated with the invasion of Ukraine, and on lessons to be learned from this for approaches to the treatment of mass insolvency risk in future crises. We asked policymakers Antonia Menezes (Senior Financial Sector Specialist in the World Bank Group) and Catherine Bridge Zoller (Senior Counsel, European Bank for Reconstruction and Development) to reflect on the same questions from a cross-country and emerging markets perspective. The result is a series of papers that, we think, significantly helps to advance understanding in relation to the questions identified above.

The papers paint a mixed picture in relation to in-crisis attempts at restructuring law reform. In relation to permanent reforms, some authors report significant improvements being made to the pre-pandemic law, albeit with some gaps in provision and missed opportunities (see, e.g., the papers by Lorenzo Stanghellini, Ignacio Tirado, and Wolfram Prusko and David Ehmke), while others are deeply sceptical (see, e.g., the papers by Kristin van Zwieten, and Horst Eidenmueller). Limitations in the design of temporary procedures, and familiarisation costs associated with their roll-out, are also reported (see, e.g., the papers by Rodrigo Rodriguez and Jasmin Ulli, Luca Jagmetti, and Petr Sprinz). Almost every country-level paper identifies one or more areas of persisting weakness or difficulty in the law. One theme in this regard relates to the privileged position of public creditors in some jurisdictions, and the implications of this for restructurings: see, e.g., the paper by Nuria Bermejo, and that by Antonia Menezes and Harry Lawless. In her cross-country paper, Catherine Bridge Zoller usefully focuses on levers available to drive further reform, including more robust approaches to data collection.

There are points of disagreement between authors on the general question of the role of restructuring procedures in a Covid-19-like crisis (compare, for example, the paper of Jan Lasák with that of Wolfram Prusko and David Ehmke; see also Horst Eidenmueller). Most authors, however, express some concerns in relation to Covid-19 bail-out design, and in particular query whether some bail-outs may have been too generous. As Luca Jagmetti puts it in relation to the experience in Switzerland:

It is, for instance, debatable whether keeping in business each and every SME by flooding billions of Swiss francs into the economy is sensible under all circumstances; in particular as it appears that the numbers of bankruptcies now start increasing, which nourishes the suspicion that a large number of bankruptcies have simply been postponed at enormous cost to the public.Footnote 17

Concern is also expressed about the restructuring of loans subject to state guarantees, and in particular the ways in which such guarantees may adversely affect restructuring incentives (see, for example, the paper by Lorenzo Stanghellini).

In other forthcoming work, we are exploring granular aspects of bail-out design in a sample of jurisdictions, with a view to testing whether relief went beyond that which was strictly necessary to minimise the amplification of the shock,Footnote 18 and the feasibility of alternatives to bail-outs. These questions could not be more important—in particular for younger generations, who must be prepared for future tax policy to allocate the cost of crisis relief administered between 2020 and 2022 to them—and we hope that the contents of this special issue will provide fresh impetus for further scholarly work in this area.

Kristin van Zwieten, Horst Eidenmueller, and Oren Sussman

Oxford, February 2023