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

43 Pages Posted: 18 Aug 2020 Last revised: 20 Aug 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; European Corporate Governance Institute (ECGI)

Oren Sussman

European Corporate Governance Institute (ECGI); University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

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 is capable of producing value-maximising outcomes in normal conditions, the temptation may be to subject this cohort to treatment by 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. In our view, 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 shutdowns, and compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by tentatively suggesting some principles to help guide the choice between bail-ins and bail-outs, and the design of either form of intervention.

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

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 ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
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

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Ben-Gurion University of the Negev

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
ISRAEL

University of London ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

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