European Insolvency Law: Development, Harmonisation and Reform; A Case Study on the European Internal Market

Author:Emilie Ghio
Position:BCL (ling, franc.), LLB, LLM, PhD Candidate
Pages:154-179
© Emilie Ghio and Dublin University Law Society
EUROPEAN INSOLVENCY LAW:
DEVELOPMENT, HARMONISATION AND
REFORM
A CASE STUDY ON THE EUROPEAN INTERNAL
MARKET
EMILIE GHIO
Introduction
A. Background and Context
Insolvency laws and regulations play a hugely important role in the
economy and wider society, given that a defining characteristic of a market
economy is the use of competitive methods in order to achieve maximum
profit. Indeed, the risk of business failure is an essential feature of economic
activity, and the sole way to avoid this risk is by not doing business at all.
1
The failure of a company affects a wide range of interests, and thus,
insolvency legislation closely interacts with other areas of law. It is therefore
of increasing importance, not only in its own right, but also in its impact and
influence on a host of other sectors.
2
With the accelerated growth in
international trade in recent decades, the paradigm of national economies
has been transformed into a more open, increasingly interconnected and
interdependent arena. While increased globalisation can be perceived as a
benefit during solvent periods of trading, the impact of insolvency
proceedings is no longer limited by geographic frontiers. It can have
devastating effects on stakeholders in a number of Member States, each of
which may claim to be competent in governing the entire insolvency
proceeding or, at least, in liquidating domestic assets and protecting
domestic creditors. In the European arena, therefore, the question arises as
to which jurisdiction should be competent to govern insolvencies.
BCL (ling, franc.), LLB, LLM, PhD Candidate. The author would like to dedicate her article
to her supervisor, Professor Irene Lynch Fannon.
1
Roy Goode, Principles of Corporate Insolvency Law (4th ed., Sweet & Maxwell, 2011), at 57.
2
Such as employment, tort, environmental, pension and banking law. See Vanessa Finch,
Corporate Insolvency Law: Perspectives and Principles (2nd ed., Cambridge University Press,
2009), at 1. See also Thomas Jackson, The Logic and Limits of Bankruptcy Law (Harvard
University Press, 1986), at 1-2.
155 Trinity College Law Review [vol 18
The 2008 financial crisis, and the following global economic
downturn adversely affected businesses around the world, resulting in
financial difficulties for many firms. The consequent increase in the number
of insolvencies highlights the need for corporate bankruptcy laws to
liquidate unviable firms and reorganise viable ones, so as to maximise the
total value of proceeds received by creditors, shareholders, employees and
other stakeholders.
After the debtor becomes insolvent, the relationship between
corporate stakeholders changes dramatically: shareholders become the
residual claimants of corporate activities.
3
Usually, creditors cannot
coordinate themselves and, therefore, often collect their debts individually,
seizing the debtor’s assets as soon as financial distress becomes apparent.
This “race to grab” leads to inefficient outcomes for the creditors as a group,
especially if the going concern value of debtors assets is higher.
4
Indeed,
the probability of a successful rescue is reduced because there are returns
for secured creditors in liquidation, which may reduce returns over a longer
period of time. Moreover, as it affects many areas of the legal landscape in
adjusting rights among creditors and other owners, bankruptcy law must
address issues in a wide variety of disciplines, including employment law,
environmental law, and tax law. Further, it must reconcile the rights of
secured creditors with other property claimants. All of these stakeholders
have contractual or statutory rights to assert claims against a debtor and their
assets, and as such, are inevitably affected by bankruptcy law.
5
These issues of variability surrounding bankruptcy law are complex
when confined to one jurisdiction, but they inevitably become even more
delicate when the debtor’s creditors and assets are spread over different
European countries. This results in insolvencies having cross-border
implications.
3
John Armour, Gerard Hertig and Hidelki Kanda, “Transactions with Creditors” in Kraakman,
Armour et al eds., The Anatomy of Corporate Law: A Comparative and Functional Approach
(2nd ed., Oxford University Press, 2009), at chapter 5.
4
Federico Mucciarelli, “Not Just Efficiency: Insolvency Law in the EU and Its Political
Dimension” (2013) 14 EBOLR 175, at 9.
5
However, some creditors are “involuntary creditors”, ie they do not have statutory or
contractual claims against the debtor, eg tort victims.

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