Harmonization of European Insolvency Law: Preventing Insolvency Law from Turning Against Creditors by Upholding the Debt-Equity Divide

34 Pages Posted: 13 Mar 2017

See all articles by Roelf Jakob de Weijs

Roelf Jakob de Weijs

University of Amsterdam - Centre for the Study of European Contract Law (CSECL)

Date Written: March 09, 2017

Abstract

In essence, insolvency law is collective debt collection law. By means of a collective procedure, insolvency law seeks to ensure that the going concern value is captured for the creditors. Where the shareholders possess the dominant voice outside of insolvency, in insolvency creditors take over this position and become the economic owners of the company. In three different setting shareholders can interfere with the insolvency process and try to capture all the value in the company or at least leave the creditors with the liquidation value and usurp the going concern surplus.

These three settings are:

(i) shareholders as secured lender,

(ii) shareholders as acquirers out of pre-packs or other asset sales and,

(iii) shareholders under composition plans.

The proposed EU Directive on Preventive Restructuring Frameworks and Second Chance (November 2016) contains measures in the field of composition plans as part of a preventive restructuring. The proposed directive addresses the potential problem that shareholders would usurp the going concern surplus by introducing the Absolute Priority Rule. The proposed directive should be considered a first step in the right direction. It should, however, be realized that the protection offered in the proposed directive could easily be circumvented by a shareholder financing not with capital but with secured shareholder loans. Also, if pre-pack sales or other sale processes do not limit interference by shareholders, shareholders will prefer the route of an asset sale above a restructuring.

Keywords: insolvency law, european contract law, european property law, proposed directive on preventive restructuring frameworks and second chance, absolute priority rule, shareholder

JEL Classification: K11

Suggested Citation

de Weijs, Roelf Jakob, Harmonization of European Insolvency Law: Preventing Insolvency Law from Turning Against Creditors by Upholding the Debt-Equity Divide (March 09, 2017). Amsterdam Law School Research Paper No. 2017-21, Centre for the Study of European Contract Law Working Paper Series No. 2017-03, Available at SSRN: https://ssrn.com/abstract=2932097 or http://dx.doi.org/10.2139/ssrn.2932097

Roelf Jakob De Weijs (Contact Author)

University of Amsterdam - Centre for the Study of European Contract Law (CSECL) ( email )

P.O. Box 1030
Amsterdam, 1000 BA
Netherlands

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