Restructuring Companies During and After the COVID-19 Pandemic: A Law & Economics Approach

Abstract

As a result of the COVID-19-pandemic, enterprises worldwide have suffered tremendously so that one of the common challenges is how to rescue companies. This paper argues that the approach of subsidising companies and, in particular, the approach of suspending legal obligations to file for insolvency which many European Member States have pursued does not rescue the companies sustainably and these mechanisms merely relieved the companies for a short period. This paper points out why it is important to put mechanisms of market shakeout back in place that have helped protect other market participants and keep the economy as a whole running for decades.

Small, medium, and large enterprises that have built up a crushing burden of debt can no longer survive on their own. The paper proposes that in these cases a restructuring must go hand-in-hand with cutting debts. The thesis will explain why, however, only the restructuring of viable companies is justifiable. The main part of this paper is the argumentation that necessary restructuring measures, such as debt reliefs, can be justified by two principles: the no-party-worse-off-principle on the one hand and the market-conformity test on the other. But only the interplay of these two principles leads to a coherent solution that is applicable to all sizes of companies. Even if both principles are only mentioned vaguely in the EU Directive 2019/1023 of June 20, 2019, they can nevertheless be derived from the Directive and may serve as principles throughout Europe.

Keywords: restructuring, market conformity, market failure, no-creditor-worse-off, debt, EU Directive 2019/1023