Risk Sharing and Value Sharing: A Study of the Effects of French Bankruptcy Law on Out-of-Court Debt Renegotiations
Revue Trimestrielle de Droit Financier, No. 1, 2011
39 Pages Posted: 14 Nov 2011 Last revised: 26 Nov 2011
Date Written: April 1, 2011
The principal aim of this study is to analyze the conduct of renegotiations between the shareholders of a company facing financial difficulty (which is operationally viable but insolvent as a result) and its bank creditors. The objective is also to assess the effects of French bankruptcy proceedings on the restructuring of such a company’s debt.
Our approach is original in that it draws upon the lessons of Law and Economics in order to study the various methods of resolving the conflict existing between creditors and shareholders in relation to the application of original risk sharing agreements when a company becomes insolvent. In the first stage of this study, we will place ourselves within a deliberately highly simplified negotiation framework in which we assume that: all financial creditors actively participate in the negotiations; the interests of the management are absolutely aligned with those of the shareholders; the parties are privy to the same level of information; the company has no short term liquidity problems; and a failure of out of court negotiations cannot give rise to the commencement of bankruptcy proceedings.
In these circumstances, the court’s role is limited to ruling on any potential disputes between creditors and shareholders which they are not able to settle themselves.
In the second stage, we will then re-introduce more complex elements into this simplified framework (asymmetry of information between the parties, uncertainty about whether the company is truly insolvent, a lack of coordination by creditors, etc.) and finally we will consider the potential for the parties to resolve their differences through French bankruptcy proceedings. In this way, we will be able to undertake a cost/benefit analysis of filing for bankruptcy proceedings from the perspective of the negotiating parties and to explain the effects of bankruptcy law on the restructuring of a company’s debt.
Finally, we intend to test French bankruptcy law’s ability to preserve the enterprise value of failing companies and to substantiate our intuitive belief that certain provisions seem at odds with the stated objective of optimizing companies’ turnaround. It would appear that French bankruptcy law can lead to prolonged negotiations, inadequate capital structures and even a manipulation of bankruptcy proceedings, as shown in the Coeur Défense case.
Keywords: bankruptcy, insolvency French law, Civil law, continental law, out of court restructuring, laws and economics, French bankruptcy law, risk sharing agreement, workout
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