The Restructuring Directive: A Functional Law and Economics Analysis from a French Law Perspective
56 Pages Posted: 2 Oct 2019 Last revised: 24 Nov 2020
Date Written: September 30, 2019
From a law and economics perspective, the existence of insolvency law is justified insofar as it is necessary for ensuring orderly and efficient coordination and negotiations between the stakeholders in case of a debtor’s economic or financial distress. The so-called "preventive" restructuring proceedings are no exception. They should, therefore, help identify and distinguish viable and non-viable businesses and facilitate the operational and financial restructuring of the former where an added value to the benefit of all the stakeholders is expected compared to their immediate liquidation.
In this respect, the recent Restructuring Directive is somewhat disappointing. Its final text bears the marks of the divergent perspectives and objectives pursued by its different drafters: the preservation of the debtor’s company at all costs, or the maximisation of the value of the debtor's assets in the interest of all of its stakeholders. The resulting text lacks, therefore, a coherent conceptual foundation, and should be understood as proposing several distinct types of proceedings.
Nevertheless, the Restructuring Directive introduces some major innovations for preventive restructuring proceedings, both with respect to the approval of restructuring plans (vote of the plan by classes of creditors, possibility of a cross-class cram-down, treating shareholders as a class of creditors in order to facilitate debt-equity swaps) and to the protections afforded for the benefit of stakeholders (best interests of creditors test, priority rules). However, the puzzling variety of diverging options for the transposition of these measures requires legislators to seek clear guidelines in order to build the national preventive restructuring proceedings on coherent foundations, even where they are all but absent at the European level.
The purpose of this paper is threefold. After a brief introduction in Part I, Part II provides the general conceptual framework of our analysis, largely based on what will be called a ‘functional’ law and economics approach, which starts with an epistemic concern with the conditions under which the decision on the reallocation of resources is to be taken. These conditions depend, in turn, on the realities of debtors’ access to finance in the relevant market.
Practitioners more interested in the Restructuring Directive in itself could skim through Part II and focus on Part III of the paper, which provides an analysis of the different models hidden in the Directive, their respective objectives and most important measures (statutory moratoria, decision-making, protections of stakeholders’ interests), including a comparison with current French pre-insolvency proceedings.
Finally, Part IV addresses some issues specific to the transposition of the Directive into French law, especially the need to increase the transparency and predictability of current proceedings in order to foster bonds and secondary debt markets. Indeed, the existence of such markets appears to be necessary if the proceedings are to function properly.
This paper is up to date as of October 2019.
Keywords: Restructuring, Bankruptcy, Insolvency, Restructuring Directive, French law, Creditors' Bargain Theory
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