Corporate insolvency law – seen from a comparative perspective

A guestpost by Prof. Dr. Reinhard Bork (Universität Hamburg)

 

The financial shipwreck of a company is a customary event in nearly all states of the world. Most jurisdictions have special statutes addressing this topic and they are – beyond terminological issues – all dealing with the same questions: how is the term “insolvency” defined? How are insolvency proceedings commenced? What are the responsibilities of the court on the one hand and of the Insolvency Practitioner on the other hand? Are there various classes of creditors and what are their procedural and substantive rights? How is the insolvency estate determined? What are the effects of the opening of insolvency proceedings on the estate? What are the consequences for executory contracts or rights to set-off? Can transactions performed prior to the opening of insolvency proceedings be reversed to the benefit of the general body of creditors? What is the legal position of secured creditors? Is restructuring of an insolvent company a possible scenario and what are the differences between liquidation and restructuring proceedings? Which rules apply to cross-border affairs, e.g. to assets located in a foreign jurisdiction?

However, although all insolvencies raise the same legal questions, the answers in national insolvency laws differ widely. This starts with terminology (even in the same language: in the USA the relevant term is “bankruptcy” whereas in the UK “insolvency” for companies is distinguished from “bankruptcy” for individuals) and it ends with the distribution of the proceeds of the debtor’s estate (US law lists ten – intricately shaped – groups of preferential creditors, German law privileges the expenses of the proceedings only, France gives employees a super-privilège ranking even ahead of secured creditors). These findings lead to a challenging question: is it reasonable to restrict the presentation of insolvency law to the rules in a specific jurisdiction or does it pay to take a broader view and to cover various national laws?

In my new book on Corporate Insolvency Law, I decided to put the depiction on a more general level and to write it as a general textbook which deals with insolvency law as such, with the principles, ideas, and general features of insolvency law, using national legislation as examples only. In this respect, throughout the book, English, French, German, and U.S. law is considered. I picked these jurisdictions because they represent world leading insolvency systems, albeit with typical differences, and their laws are role models for many other states. Pursuing such a comparative approach pays off, since it opens one’s eyes to the core of specific problems, reveals the strengths and weaknesses of national solutions and unveils the basic principles and essential criteria for solving practical problems. This shall be illustrated with two examples.

First, where the debtor company has rented real estate which is used for storing commodities, is the lease contract automatically terminated upon the opening of the insolvency proceedings or does either the Insolvency Practitioner or the landlord have an extraordinary termination right? The answer is in the negative in Germany, since German insolvency law provides for the continuance of lease agreements (albeit for immovables only). This leads to an – albeit modified – application of general contract law: the landlord is not allowed to terminate the contract extraordinarily, neither for the tenant’s insolvency nor for behindhand rents due before the opening of insolvency proceedings. On the other hand, the Insolvency Practitioner is also referred to general contract law with the exception of a reduction of statutory or contractual termination periods to three months. Things are different in France, the UK and the US. In these jurisdictions, lease contracts are not terminated automatically upon the opening of insolvency proceedings but are subject to the Insolvency Practitioner’s choice to assume or reject the agreement. The latter solutions disregards the interests of the landlord completely which is debatable under the principle of proportionality.

The second example concerns the avoidance of preferences. Assuming that C, a creditor of D, applies for the opening of insolvency proceedings against D. Before the court’s opening decision, D pays V, a supplier company who refuses to deliver goods urgently needed for the continuation of D’s business unless outstanding debts are paid. After the opening decision, the Insolvency Practitioner sues V for repayment. This would be successful in England and Wales unless the court is convinced that D did not act with the necessary desire to put V in a better position, since D paid old debts in order to get new deliveries. Under French law, everything depends on V’s knowledge of D’s cessation of payments. Also, in Germany, V has to pay the money back provided V knew of the debtor’s inability to pay debts or of the insolvency application. The same results are likely in the USA, since it is not in the ordinary course of business if an outstanding debt is paid after the application for insolvency proceedings. It is interesting that English law refers to the debtor’s intent whereas the other jurisdictions focus on the creditor’s knowledge. Since V was put in a better position compared to its fellow creditors, the avoidance action is supported by the principle of equal treatment of creditors. As opposed to that, legitimate expectations of creditors that they may keep what they have duly received must be taken into account under the principle of protection of trust. However, this can hardly depend on the intent of the debtor, since it is the knowledge of the creditor which weakens his or her worthiness of trust protection.

In sum, approaching insolvency law from a comparative perspective is a fascinating endeavour. It expands one’s horizon, helps to better understand domestic legislation and adds to the list of criteria when applying the law in concrete cases. It’s worth the effort!

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