Bail-outs and Bail-ins are better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress

46 Pages Posted: 18 Aug 2020 Last revised: 14 Nov 2020

See all articles by Kristin van Zwieten

Kristin van Zwieten

University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Horst Eidenmueller

University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Oren Sussman

European Corporate Governance Institute (ECGI)

Date Written: August 8, 2020

Abstract

COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more ‘lockdowns’, multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the way in which they treat the cohort of newly bankrupt businesses. In jurisdictions where a well-functioning reorganisation procedure can produce value maximising outcomes in normal conditions, the temptation may be to subject this cohort to such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor ‘fit’ for the treatment of COVID-19 distress. The more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor’s liabilities, or a class thereof), or some combination of the two. In this paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shut-downs, and we compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by suggesting principles to help guide the choice between bail-ins and bail-outs, and the design of either form of intervention. These principles should offer a useful starting point for thinking about the design and delivery of novel forms of relief to debtors distressed by COVID-19 related revenue losses.

Keywords: Bankruptcy, Bail-out, Bail-in, Reorganisation, COVID-19 Distress, Public Policy

JEL Classification: D61, E62, G33, K22

Suggested Citation

van Zwieten, Kristin and Eidenmueller, Horst G. M. and Sussman, Oren, Bail-outs and Bail-ins are better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress (August 8, 2020). European Corporate Governance Institute - Law Working Paper No. 535/2020, Available at SSRN: https://ssrn.com/abstract=3669541 or http://dx.doi.org/10.2139/ssrn.3669541

Kristin Van Zwieten

University of Oxford - Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Horst G. M. Eidenmueller (Contact Author)

University of Oxford - Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Oren Sussman

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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