A Critical Appraisal of French Bankruptcy Law Through the Lens of the Law and Economics Movement: A Solution for the Future?
Revue Trimestrielle de Droit Financier, No. 1, 2010
40 Pages Posted: 15 Nov 2011 Last revised: 21 Nov 2011
Date Written: April 1, 2010
The financial crisis has exposed the limitations of French bankruptcy law. The fundamental criticism is that, when designing French bankruptcy law, French law makers have never tried to use the lessons learned from Law and Economics. French law ignores the fact that shareholders’ interests can conflict with those of failing companies. Furthermore, French law refuses to recognize that shareholders’ interests may sometimes be no longer aligned with those if the company and that, instead, certain creditors have taken over as residual owners. Despite the finance 'boom', French law, in common with other European legal systems, has been entrenched in dogmatic concepts derived from a bygone era. It is still difficult to distinguish the shareholder’s fate from that of the company, even in an insolvency situation. Various reforms in bankruptcy law have thus led to an automatic wealth transfer from creditors to shareholders, which is unjustified given that shareholders and creditors are both, after all, in many cases, merely financial investors. The current situation reveals some deficiencies within French bankruptcy law, which is ultimately more 'pro-shareholder' than 'pro-debtor.' The law in its current state brings about a destruction in enterprise value as a result of: longer negotiations between shareholders and creditors, unsound compromises leading to an insufficient reduction in the level of debt in companies emerging from bankruptcy proceedings, forum shopping, and many hold out / free rider issues etc. which cannot be resolved. The evolution of French corporate finance capital markets should lead French law makers to question the attractiveness of French bankruptcy law. Greater attention to the order of priority between creditors and shareholders in France would allow the emergence of a Debtor in Possession (DIP) financing market, the development of the high yield bond market and the use of hybrid bonds.
Keywords: French bankruptcy law, civil law, continental law, insolvency, hybrid, debtor in financing, laws and economics, regulations, financial markets, European legal systems
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