Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition

CHAPTER 8International Evidence

Insolvency laws vary considerably across countries, as do protections for creditors and enforceability of contracts outside of insolvency procedures.¹ The country‐specific legal system drives the treatment of claimants to the firm's assets, the use of court supervised restructuring versus restructuring out of court, and ultimately the prospects for reorganization versus liquidation of distressed firms in those countries.

While the specific provisions of insolvency laws differ by country, several key characteristics can be used to broadly characterize the system as debtor or creditor friendly. Legal regimes oriented toward protecting the debtor, such as the U.S. system, provide more opportunity for rehabilitation. Creditor‐based regimes, such as those modeled off UK common law, more often lead to or even require sale of the business assets or liquidation. Answering a set of eight key questions at the country level is helpful in characterizing insolvency procedures, as well as the overall usage or avoidance of in court restructurings in a given country:²

1. Do classes of creditors have unilateral rights to seek court protection or appoint responsible parties to handle affairs of a business in default?
2. Are there any restrictions, such as creditor consent or an insolvency test, for a debtor to seek court protection?
3. Are officers and directors of the company subject to civil or criminal proceedings for operating the business while insolvent?
4. Does the ...