Differences between theory and practice

A survey on legal systems all over the world
(PresseBox) (Munich, ) Ecovis’ offices in 21 countries participated in a comparative survey which reflects a crosssection of different legal systems and levels of economic development, from Argentina to Vietnam, Romania to Great Britain. The objectives of their bankruptcy legislation vary widely in their intent, too. In most countries (71%), the creditors’ interests take priority. In roughly two in every three countries (62%), the fair distribution of assets among the creditors is also one of the prime objectives.
Bankruptcy proceedings primarily designed to make it easier for debtors to make a new financial start take only second place in the priority of most countries (71%), for example by exonerating them of residual debt. However, in contrast, finding ways for them to save their businesses and thus the jobs that go with them takes top priority in 38% and second priority in 52% of the responding countries.

Irrespective of all the differences, legislators in nearly every country strive to give a second chance to those bankrupt businesses capable of submitting a credible concept as a going concern. For the creditors too, this is often a better solution than liquidation. Of all the countries surveyed, 86% consider financial reorganisation, following the model of Chapter 11 of US insolvency law or in line with the German voluntary scheme of arrangement (literally “insolvency plan”), to be a viable possibility. In such cases businesses come to an agreement with their creditors on a plan designed to alleviate their financial burden and to refloat them financially.

Challenges of reorganisation
In actual practice, however, bankruptcy proceedings usually result in liquidation, i. e. the exploitation of any assets still available to creditors and the ensuing closure of the company. All the 21 international Ecovis partners who replied to the question about the most common treatment of bankruptcy gave liquidation as their only answer, while only eight cited reorganisation and establishment of a going concern as another choice.
The problem on the one hand is an inherent one: in many cases the insolvent business is in such financial distress, or even bled white, that there is only a slim chance of a new start being successful. It is often the managers, partners or creditors themselves who shy away from the challenges associated with keeping the business going, prefering to bite the bullet and make a clean cut rather than contemplate taking further risks. Drawing up an insolvency plan to establish reorganisation arrangements places greater demands on the expertise of the liquidator and the management of the company itself.
Another challenge is the procedural hurdles to be overcome. In Great Britain, for example, one of two turn-around options is only seldom used, because 75% of the creditors and the courts have to agree to this, and any such arrangement, should it even ever be put in place, would take too long. In Germany the German Insolvency Act of 2012 makes it easier to adopt a voluntary scheme of arrangement to create a going concern – one of the measures being to make it much harder for individual creditors to veto the project.

Author
Monica Esterka, ECOVIS Monica Esterka Law Office, Bucharest

Contact

ECOVIS AG Steuerberatungsgesellschaft
Ernst-Reuter-Platz 10
D-10587 Berlin
Telephone: +49 (30) 31000854
Julia Hanke
Ecovis/ PR
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