Aims of insolvency law

What is the goal of insolvency law? This question came up recently at a INSOL Younger Academics catch-up. Apparently, there has been some discussion in this in the EU. That was interesting because I had been thinking of this from the perspective of the Insolvency and Bankruptcy Code in India when Dr. M.S. Sahoo (chair of the insolvency regulator in India) said that the only aim of the IBC was resolution of the corporate debtor, and not recovery. I thought that this cannot always be true. Sometimes, it maybe in the interests of all stakeholders to liquidate the firm. But when I dug backwards, Sahoo seems to have made a somewhat similar statement in in 2018. He said that the ‘objective [of IBC] is to keep the firm alive, to maximise the value of the asset and balance the interests of all stakeholders’ and ‘definitely not liquidation’.

Interestingly, even the focus on resolution has not played out in a way that allows debtors to propose a plan which restructures the firm but allows the debtor to stay in control. Renuka Sane observes that the process under the IBC has in effect, come to ‘require that resolution plans be exclusively in [the] form of bids to purchase the firm’. She further points out that ‘there is a general understanding among creditors that they should accept the highest bid rather than assess operational and management plans for firms’. So the IBC seems to have become (in practice) focused on one type of resolution alone.

With this background, I was curious about the EU discussion on this. Giulia Ballerini  pointed me to some Excellent material on this and I’m grateful to her.

In Chapter 4 of the JCOERE Project, the authors make note of the two goal – resolution (also called rehabilitation or rescue) and liquidation. They then note that there is some resistance to rescue amongst European commentators. One of their arguments against rescue seems to be that ‘a going concern sale can be achieved as easily through liquidation’. For example, Nicolaes Tollenar writes in his book that ‘the going concern value of the business can also be realised through liquidation’ [47].

I find such strong opposition to rescue curious; in the same way that I find strong promotion of rescue as the only goal. Perhaps the EU commentators were simply pushing back against similar regulatory focus on rescue? Indeed the authors of the JCOERE Project note that the EU preventive restructuring framework seems to have endorsed rescue. Rotaru notes that ‘the final Report of the European Law Institute on “Rescue of Business in Insolvency Law”, which laid the foundation of the Restructuring Directive, explicitly sets the protection of jobs and of debtors in some specific industries as legitimate objectives of the’ preventive proceedings.

I think such focus on resolution without allowing commercial factors like viability to determine the route taken is not productive and commentators are right to push back. At the same time, the benefits of resolution, where this is suitable, should not be ignored either. Sean Lee, from Singapore, seemed to echo a similar case specific view when the issue was discussed at the INSOL Younger academics catch-up. In any case, this debate in the EU is an interesting one and worth paying attention to in India as well.