Week 5 ICIL
World Bank Doing Business Index 2016 suggests that recovery rates are higher in economies where
restructuring is the most common insolvency proceeding. This result coupled with policy considerations
(e.g. preserving jobs and securing social cohesion) can explain the recent trend towards adopting more
rehabilitative approaches in insolvency regulation. We will discuss some of such initiatives, including,
most importantly, the EU Directive on restructuring and insolvency (EU 2019/1023).
LECTURE 5
5.1 – EMERGENCE OF A BUSINESS RESCUE CULTURE
From PIL to substantive insolvency regimes
This week we will make a transition from the private international law (PIL), to the more substantive
insolvency law regimes. How does it work with regards to the ordering and structuring of the individual
insolvency proceedings themselves? This will be the main question of this week – we will look at how
this is answered and how this has developed throughout the years.
Recital 22 EIR 2015:
“as a result of widely differing substantive laws it is not practical to
introduce insolvency proceedings with universal scope throughout
the Union.”
So far, we’ve looked at how all different types of proceedings can be
recognized in different jurisdictions (formal insolvency, formal
reorganization, hybrid proceedings, enhanced restructuring, informal
restructuring). More time and effort have been put into updating
these proceedings and making them more efficient and effective.
Historical approaches
Ancient Rome – Twelve Tables (450 BCE)
- Debt unpaid for 30 days: debtor was given in a private bondage to the creditor
- Debt unpaid for a further 60 days: creditor was entitled to put the debtor to death ( partissecanto) or
sell him into slavery
Late Republic/Empire (1st century BCE – 1st century CE)
- Forfeiture and sale by public auction of debtor’s property, distribution of proceeds among creditors
(cession bonorum).
- Considerable personal significance of bankruptcy–infamia
- The idea of discharge from unpaid or only partially paid debts never became part of Roman Law.
Middle Ages
Indebtedness from feudal relationships:
- Landlord power to seize and hold the tenant’s property until the debt was paid or secured;
- Every Lord in England had a right to hold a court for his tenants.
Indebtedness of merchants
- Rules and principles developed from Lex Mercatoria applied by Merchants courts established in
independent cities / States;
- Based on Roman law.
1
, English Bankruptcy Act 1542
‘…craftily obtaining into their hands great substance of other men’s goods do
suddenly flee to parts unknown or keep their houses, not minding to pay or
restore to any their creditors their debts and duties, but at their own will and
pleasure consume the substance obtained by credit of other men, for their own
pleasure and delicate living, against all reason, equity and good conscience ...the
Lord Chancellor ... shall have power and authority by virtue of this Act to
take ... imprisonment of their bodies or otherwise, as also with their [real and
personal property however held] and to make sale of said [real and personal
property however held] for true satisfaction and payment of the said creditors…’
Modern age
- Rise of limited liability company form
- Shift of the burden to creditors who could only use their bargaining power to
obtain further info while conducting due diligence and negotiating contract terms
- Gradual realization that insolvency was an unavoidable risk of trade
- No specific legislation crafted for companies (e.g. 1883 Bankruptcy Act)
Application of general bankruptcy provisions.
Joseph Chamberlain (President of the Board of Trade): “to do something to improve the general tone of
commercial morality, to promote honest trading, and to lessen the number of failures. In other words,
Parliament had to endeavor, as far as possible, to protect the salvage and also to diminish the wrecks.”
Business rescue approaches
World Bank Doing Business 2018 Report
‘Insolvency laws have traditionally focused on enabling the swift
liquidation of insolvent companies while organizing the repayment
of creditors. The focus of modern insolvency regimes has been to
offer restructuring tools to companies that are economically viable
but face temporary financial distress in order to maintain the
business activity’
Birth of rescue culture
After the Great Financial Crisis (1929) new forms of
reorganization were explored, offering more and better options.
U.S. Chapter 11Bankruptcy Code
One of the best examples. Many countries have taken inspiration
from this legal document when developing and updating their
insolvency laws. The Federal reorganization Proceeding introduced
1978:
“The principal purpose of the Bankruptcy Code is to grant a fresh
start to the honest but unfortunate debtor.” – Marrama v. Citizens
Bank of Massachusetts, 127 S. Ct. 1105, 1107 (2007) – USA
2
World Bank Doing Business Index 2016 suggests that recovery rates are higher in economies where
restructuring is the most common insolvency proceeding. This result coupled with policy considerations
(e.g. preserving jobs and securing social cohesion) can explain the recent trend towards adopting more
rehabilitative approaches in insolvency regulation. We will discuss some of such initiatives, including,
most importantly, the EU Directive on restructuring and insolvency (EU 2019/1023).
LECTURE 5
5.1 – EMERGENCE OF A BUSINESS RESCUE CULTURE
From PIL to substantive insolvency regimes
This week we will make a transition from the private international law (PIL), to the more substantive
insolvency law regimes. How does it work with regards to the ordering and structuring of the individual
insolvency proceedings themselves? This will be the main question of this week – we will look at how
this is answered and how this has developed throughout the years.
Recital 22 EIR 2015:
“as a result of widely differing substantive laws it is not practical to
introduce insolvency proceedings with universal scope throughout
the Union.”
So far, we’ve looked at how all different types of proceedings can be
recognized in different jurisdictions (formal insolvency, formal
reorganization, hybrid proceedings, enhanced restructuring, informal
restructuring). More time and effort have been put into updating
these proceedings and making them more efficient and effective.
Historical approaches
Ancient Rome – Twelve Tables (450 BCE)
- Debt unpaid for 30 days: debtor was given in a private bondage to the creditor
- Debt unpaid for a further 60 days: creditor was entitled to put the debtor to death ( partissecanto) or
sell him into slavery
Late Republic/Empire (1st century BCE – 1st century CE)
- Forfeiture and sale by public auction of debtor’s property, distribution of proceeds among creditors
(cession bonorum).
- Considerable personal significance of bankruptcy–infamia
- The idea of discharge from unpaid or only partially paid debts never became part of Roman Law.
Middle Ages
Indebtedness from feudal relationships:
- Landlord power to seize and hold the tenant’s property until the debt was paid or secured;
- Every Lord in England had a right to hold a court for his tenants.
Indebtedness of merchants
- Rules and principles developed from Lex Mercatoria applied by Merchants courts established in
independent cities / States;
- Based on Roman law.
1
, English Bankruptcy Act 1542
‘…craftily obtaining into their hands great substance of other men’s goods do
suddenly flee to parts unknown or keep their houses, not minding to pay or
restore to any their creditors their debts and duties, but at their own will and
pleasure consume the substance obtained by credit of other men, for their own
pleasure and delicate living, against all reason, equity and good conscience ...the
Lord Chancellor ... shall have power and authority by virtue of this Act to
take ... imprisonment of their bodies or otherwise, as also with their [real and
personal property however held] and to make sale of said [real and personal
property however held] for true satisfaction and payment of the said creditors…’
Modern age
- Rise of limited liability company form
- Shift of the burden to creditors who could only use their bargaining power to
obtain further info while conducting due diligence and negotiating contract terms
- Gradual realization that insolvency was an unavoidable risk of trade
- No specific legislation crafted for companies (e.g. 1883 Bankruptcy Act)
Application of general bankruptcy provisions.
Joseph Chamberlain (President of the Board of Trade): “to do something to improve the general tone of
commercial morality, to promote honest trading, and to lessen the number of failures. In other words,
Parliament had to endeavor, as far as possible, to protect the salvage and also to diminish the wrecks.”
Business rescue approaches
World Bank Doing Business 2018 Report
‘Insolvency laws have traditionally focused on enabling the swift
liquidation of insolvent companies while organizing the repayment
of creditors. The focus of modern insolvency regimes has been to
offer restructuring tools to companies that are economically viable
but face temporary financial distress in order to maintain the
business activity’
Birth of rescue culture
After the Great Financial Crisis (1929) new forms of
reorganization were explored, offering more and better options.
U.S. Chapter 11Bankruptcy Code
One of the best examples. Many countries have taken inspiration
from this legal document when developing and updating their
insolvency laws. The Federal reorganization Proceeding introduced
1978:
“The principal purpose of the Bankruptcy Code is to grant a fresh
start to the honest but unfortunate debtor.” – Marrama v. Citizens
Bank of Massachusetts, 127 S. Ct. 1105, 1107 (2007) – USA
2
