Bankruptcy Law: a Mechanism of Governance for Financially Distressed Firms.

This paper explores the various governance models for financially distressed firms. We offer a new typology of major bankruptcy models and provide a connection between this bankruptcy law puzzle and the variables depicting the governance of healthy firms in order to shed light on two topics: (1) the factors that the lawyer should consider before removing its national bankruptcy law, and (2) the risks associated with each bankruptcy model according to the economic literature on bankruptcy law. Our final aim is to test whether the various bankruptcy models detailed in the paper perform in separate economic and legal environments.Bankruptcy, Governance, Law and Economics.

Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma?

We study the French dilemma associated with court administered resolution of corporate financial distress of firms, in which bankruptcy courts have to combine both social efficiency (maintaining employment) and ex post financial efficiency (determining the best issue for financial distress, proxied here by the global recovery rate). We discuss this dilemma empirically, using a large sample of decisions of French commercial courts concerning the future of bankrupt firms (reorganization, sale as a going concern or liquidation). Addressing this dilemma, we discuss the determinants of bankruptcy courts’ selection between rival offers in sales as a going concern. Finally, we evaluate the financial cost of the French pro debtor system through the recovery rates of various claimants. Our main results are: (1) French commercial courts actively work to protect employment by facilitating continuation and reducing the domino effects of bankruptcy. (2) the courts’ choice between rival buyout offers confirms that social considerations prevail in the arbitration of bankruptcy courts. (3) Continuations through reorganization plans generate the highest recovery rates for all classes of creditors. (4) Contrary to the expected trade-off between social and financial efficiency, courts also enact measures to increase debt recovery once continuation has been chosen. However, for sales, recovery rates are inhibited by asset illiquidity and/or by the courts’ attempt to promote a firm’s continuation through sales at a low price.Bankruptcy, Reorganization; Liquidation; Recovery rate.

La détresse financière des entreprises: trajectoire du déclin et traitement judiciaire du défaut

This thesis aims to evaluate the efficiency of bankruptcy laws on an ex ante and ex post point of view according to three criteria: their financial efficiency, their social efficiency and their macroeconomic coherence. First, we analyze the economic and financial path of default and its legal treatment in order to determine the potential costs induced by the social objectives (employment preservation) of French bankruptcy law in terms of recoveries for creditors. We find that the legal treatment of default is in France implemented in the spirit of the objectives defined and hierarchized by the law, and that the court undertakes measures in order to also protect financial interests; this result invalidates our hypothesis that these two objectives are incompatible. Subsequently, we adopt a Law and Finance approach in order to bind bankruptcy codes to national environments. We offer an appreciation of the macroeconomic degree of coherence of default, which is in our opinion an element of its efficiency

Corporate financial distress,path of decline and legal treatment of default

L'objet de cette thèse est d'apprécier l'efficacité des procédures collectives d'un point de vue à la fois ex ante et ex post au regard de trois critères : leur efficacité financière, leur efficacité sociale et leur cohérence macroéconomique. Il s'agit d'une part d'analyser la trajectoire économique et financière du défaut et son traitement judiciaire afin de déterminer les coûts potentiels induits par les objectifs sociaux (la préservation de l'emploi) du droit français de la défaillance en termes de recouvrements pour les créanciers. Nous obtenons que, le traitement judiciaire du défaut est en France mis en oeuvre dans l'esprit des objectifs définis et hiérarchisés par la loi et que le tribunal entreprend des mesures afin de défendre non seulement les intérêts sociaux, mais également, une fois ceux-ci protégés, les intérêts financiers; ce résultat infirme notre hypothèse selon laquelle ces deux objectifs sont inconciliables. D'autre part, nous adoptons une approche Law and Finance afin de lier les codes de défaillance aux environnements nationaux. Nous proposons une appréciation du degré de cohérence macroéconomique du défaut, lequel constitue selon nous un élément de son efficacité.This thesis aims to evaluate the efficiency of bankruptcy laws on an ex ante and ex post point of view according to three criteria : their financial efficiency, their social efficiency and their macroeconomic coherence. First, we analyze the economic and financial path of default and its legal treatrnent in order to determine the potential costs induced by the social objectives (employment preservation) of French bankruptcy law in terms of recoveries for creditors. We find that the legal treatrnent of default is in France implemented in the spirit of the objectives defined and hierarchized by the law, and that the court undertakes measures in order to also protect financial interests; this result invalidates our hypothesis that these two objectives are incompatible. Subsequently, we adopt a Law and Finance approach in order to bind bankruptcy codes to national environments. We offer an appreciation of the macroeconomic degree of coherence of default, which is in our opinion an element of its efficiency

Corporate financial distress,path of decline and legal treatment of default

L'objet de cette thèse est d'apprécier l'efficacité des procédures collectives d'un point de vue à la fois ex ante et ex post au regard de trois critères : leur efficacité financière, leur efficacité sociale et leur cohérence macroéconomique. Il s'agit d'This thesis aims to evaluate the efficiency of bankruptcy laws on an ex ante and ex post point of view according to three criteria : their financial efficiency, their social efficiency and their macroeconomic coherence. First, we analyze the economic an

Bankruptcy law: a mechanism of governance for financially distressed firms

Bankruptcy, Governance, Law and economics, K29,

Entreprises en difficultés : l’arbitrage des tribunaux entre maintien de l’emploi et apurement du passif

Wenn ein in Schwierigkeiten befindliches Unternehmen in Zahlungsschwierigkeiten gerät, müssen die Handelsgerichte zwischen der Aufrechterhaltung der Geschäftstätigkeit und der Schuldentilgung wählen. Diese Schlichtung muss gemäß dem Gesetz betreffend die gerichtliche Behandlung der in Schwierigkeiten befindlichen Unternehmen erfolgen. Bislang sind nur wenige Studien über die Praxis der Gerichte und die allgemeinen Ziele dieser Rechtsvorschrift vorgenommen worden. Eine solche Analyse kann sich auf drei Fragen beschränken :. (1.) Welches sind die Determinanten für die Aufrechterhaltung der Geschäftstätigkeit der in einem Vergleich befindlichen Unternehmen, wobei sich die Frage stellt, wie die Gerichte das Verfahren verwalten ? (2.) Hängt die Schuldentilgung von den Maßnahmen ab, die die Gerichte während des Verfahrens in die Wege leiten ? (3.) Wie entscheiden die Gerichte zwischen Wahrung der Arbeitsplätze und Schuldentilgung, wenn mehrere Kaufangebote vorliegen ? Diese Untersuchung stützt sich auf die Daten, die bei den Handelsgerichten (von Paris und der Parser Region) erhoben worden sind und gewisse Aufschlüsse geben : Die Daten ermöglichen die Erstellung einer Stichprobe von Unternehmen, die im Zeitraum von 1989 bis 2005 zahlungsunfähig waren und von denen einige ihre Geschäftstätigkeit mittels eines Vergleichs (Pläne zur Fortsetzung der Geschäftstätigkeit oder Einstellung) aufrechterhalten konnten, wohingegen andere ihre Vermögenswerte im Rahmen eines Gerichtsverfahrens veräußern mussten. Diese Daten legen den Schluss nahe, dass die Maßnahmen der Gerichte während des Gesamtinsolenzverfahrens die Chancen einer Gesundung der Unternehmen erhöhen. Allerdings zeigen sie keine signifikante Beziehung zwischen ihren Maßnahmen und der Schuldentilgung auf. Bestätigt wird zudem die Sensibilität der Gerichte gegenüber der Wahrung der Arbeitsplätze, die bei den Übernahmen angekündigt wurden. Dagegen widerlegt unsere Studie die Hypothese, wonach die Entscheidungen der Gerichte dem Verzicht der Gläubiger entgegenstünden.When an ailing business goes bankrupt, the commercial court must strike a balance between keeping the firm in operation and settling its liabilities. This trade-off is written into the Act on court proceedings for dealing with insolvent enterprises. Few studies to date have compared court practices with the broad goals defined by lawmakers. We can analyze the issue by asking a series of three questions : (1) What factors shape the decision to keep a firm in operation by placing it in receivership ? Is this outcome determined by the court’s handling of the proceedings ? (2) Does the settlement of liabilities depend on the court’s actions during the proceedings ? (3) How does the court strike a balance between preserving jobs and settling liabilities when several bidders are competing to acquire the firm ? Our study, based on data collected in commercial courts (Paris and Paris Region), provides some answers. We used the data to create a sample of ailing firms for the period 1989-2005 : some remained active after being put in receivership (involving plans to continue operations or be sold off) ; others had to sell their assets under a court-ordered liquidation. The data suggest that the actions of the courts during collective insolvency proceedings increase the chances of a firm’s recovery. However, we do not find a significant link between the courts’ actions and the settlement of liabilities. Lastly, the data confirm the assumption that judges are responsive to the job-preservation argument when examining acquisition bids. Yet our study invalidates the notion that the choices made by the courts are detrimental to the satisfaction of creditors’ claims.Lorsqu’une entreprise en difficultés fait défaillance, les tribunaux de commerce doivent arbitrer entre le maintien de l’activité et de l’emploi et l’apurement du passif. Cet arbitrage est inscrit dans la loi sur le traitement judiciaire des entreprises en difficultés. Peu d’études ont jusqu’ici rapproché les pratiques des tribunaux des objectifs généraux définis par le législateur. Une telle analyse peut se ramener à formuler successivement trois questions. (1) Quels sont les déterminants du maintien de l’activité des entreprises par redressement judiciaire : celui-ci est-il lié à la manière dont les tribunaux gèrent la procédure ? (2) L’apurement du passif dépend-il des actions engagées par les tribunaux durant la procédure ? (3) Comment les tribunaux arbitrent-ils entre maintien de l’emploi et apurement du passif lorsque plusieurs offres de rachat se font concurrence ? Cette étude s’appuyant sur les données collectées dans les tribunaux de commerce (Paris et Région parisienne) apporte quelques éléments de réponse : ces données permettent de constituer un échantillon d’entreprises défaillantes sur la période 1989-2005, dont certaines poursuivront leur activité via un redressement judiciaire (plans de continuation ou de cession) alors que l’actif des autres sera réalisé dans le cadre d’une liquidation judiciaire. Ces données suggèrent que l’action des tribunaux durant la procédure collective augmente les chances de redressement des entreprises. Toutefois, elles ne font pas ressortir de lien significatif entre leur action et l’apurement du passif. Enfin, la sensibilité des juges au maintien de l’emploi annoncé dans les propositions de reprise est confirmée. Pour autant, notre étude invalide l’hypothèse selon laquelle les choix des tribunaux nuiraient au désintéressement des créanciers.Cuando una empresa en dificultad solicita la declaración de concurso, los juzgados mercantiles han de arbitrar entre el mantenimiento de la actividad y del empleo o el procedimiento de liquidación. Este arbitraje se encuentra previsto en la ley de tratamiento judicial de empresas en dificultad. Hasta el momento, pocos estudios han comparado las prácticas de los tribunales con los objetivos generales previstos por el Legislador. Se puede afrontar tal estudio formulando sucesivamente tres cuestiones : 1) ¿ Qué criterios se aplican para el mantenimiento de la actividad de la empresa por recuperación judicial ? ¿ Acaso ésta depende de la forma en la que los tribunales gestionan el procedimiento ? 2) ¿ La liquidación depende de las acciones establecidas por los tribunales en el curso del procedimiento ? 3) Cuando concurren varias ofertas de compra de la deuda, ¿ cómo actúan los tribunales a la hora de arbitrar entre el mantenimiento del empleo y la liquidación ? En atención a los datos recogidos en los tribunales mercantiles de París y su región, este estudio aporta algunos elementos de respuesta. Estos datos permiten constituir una muestra de empresas en concurso entre 1989 y 2005, de las cuales algunas continuaron su actividad gracias a una recuperación judicial (a través de un plan de continuación o de cesión), y otras, sin embargo, vieron su activo determinado en un procedimiento de liquidación judicial. Estos datos sugieren que, en el concurso de acreedores, la acción judicial aumenta las posibilidades de recuperación de las empresas. No obstante, no dejan entrever un nexo significativo entre la acción judicial y la liquidación. Por último, se confirma la sensibilidad de los jueces para mantener el empleo anunciado en las propuestas de recuperación. Finalmente, nuestro estudio invalida la hipótesis según la cual los criterios de los tribunales perjudicarían la compensación de los acreedores.Guigou Jean-Daniel, Fimayer Agnès, Chopard Bertrand, Blazy Régis. Entreprises en difficultés : l’arbitrage des tribunaux entre maintien de l’emploi et apurement du passif. In: Economie et statistique, n°443, 2011. pp. 51-75

Employment preservation vs. creditors' repayment under bankruptcy law: The French dilemma?

The paper investigates the French dilemma associated with court administered resolution of corporate financial distress. In such a legal system, the courts seek a double objective: maintaining job positions through continuation, and determining the best outcome for the claimants. We discuss this dilemma empirically, using a unique sample of bankruptcy files on French SMEs. We address successively three critical questions. First, we highlight the determinants of the final bankruptcy outcome (continuation through reorganization or sale, or piecemeal liquidation): does continuation (the most employment-friendly outcome) depend on the firm's characteristics, and/or on the way the procedure is managed? Second, we study the determinants of the creditors' recovery rates: do the courts play an active role in increasing recoveries? Third, we address the dilemma directly by focusing on sales as a going concern. We model the court administered selection process between rival buyout offers: do the courts balance the social content against the financial content of each offer? Is there an explicit arbitrage between employment preservation and creditor recoveries? Our main results are: (1) the French courts actively work to facilitate continuation against liquidation, and thus play a role in employment preservation. Besides, we find continuation is more likely to prevail when default is an outcome of specific difficulties (outlets, finance, and production). (2) We confirm the Radulovic (2008) findings: the global recovery rate mainly depends on the firm's ex ante characteristics at the time of triggering, while the way the procedure is managed by the court has little impact. Similarly to LoPucki and Doherty (2007), continuation via reorganization does not generate lower recovery rates on average than the other outcomes. (3) Last, the courts' choice between rival buyout offers confirms that social considerations prevail in the arbitration. Yet, the courts still consider financial issues as well (a higher sale price increases the chances that an offer is selected), but without clear connection with the amount of due claims (one direct consequence is a moderate recovery rate on sales).Bankruptcy Reorganization Liquidation Employment Recovery rate

Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma?

We study the French dilemma associated with court administered resolution of corporate financial distress of firms, in which bankruptcy courts have to combine both social efficiency (maintaining employment) and ex post financial efficiency (determining the best issue for financial distress, proxied here by the global recovery rate). We discuss this dilemma empirically, using a large sample of decisions of French commercial courts concerning the future of bankrupt firms (reorganization, sale as a going concern or liquidation). Addressing this dilemma, we discuss the determinants of bankruptcy courts’ selection between rival offers in sales as a going concern. Finally, we evaluate the financial cost of the French pro debtor system through the recovery rates of various claimants. Our main results are: (1) French commercial courts actively work to protect employment by facilitating continuation and reducing the domino effects of bankruptcy. (2) the courts’ choice between rival buyout offers confirms that social considerations prevail in the arbitration of bankruptcy courts. (3) Continuations through reorganization plans generate the highest recovery rates for all classes of creditors. (4) Contrary to the expected trade-off between social and financial efficiency, courts also enact measures to increase debt recovery once continuation has been chosen. However, for sales, recovery rates are inhibited by asset illiquidity and/or by the courts’ attempt to promote a firm’s continuation through sales at a low price.Bankruptcy, Reorganization, Liquidation, Recovery rate.