‘In short, theory matters’, the three editors submit on the first page of their introduction to this book. They underline the important role that legal theory plays in the development of insolvency law. All 15 contributions (next to an introduction and a welcome editors’ conclusion) explore how law and theory are able to respond to issues of financial distress in the 21st century as well as to questions how insolvency law could develop to address contemporary challenges. The book I am discussing here is: Emilie Ghio, John M. Wood, Jennifer L.L. Gant (eds.), Re-examining Insolvency Law and Theory, Perspectives for the 21st Century, Edward Elgar Publishing, 2023. ISBN 978 1 80392 875 3. VIII + 304 pp.
In its organisation, the book is a textbook example of a well-designed and detailed research question. In addition to the clear introduction and detailed summary/conclusion, it has three themes, covered in fifteen chapters. The first part deals with philosophical considerations and their influence on insolvency laws. As contributors we meet Omar (Insolvency law and morality), Milman (The liberalisation of bankruptcy law), Jacobs (Insolvency and the legal feminist movement), Brown and Anderson (A Dworkinian approach to insolvency law), Tribe (A Nietzchean approach to debt en human thought), and Potamitis and Paparrigopoulos (A Rawlsian approach to preventive restructuring).
The second theme is shorter and presents four chapters under the umbrella ‘An inward-looking study of insolvency law’. Contributing authors are Wood (Decision theory and insolvency law), Harris (The competing goals theory and insolvency law), Coordes (Successor liability theory and insolvency law), and Gant (Vulnerability theory and insolvency).
In the third theme (‘An outward-looking study of insolvency law’) all contributions are looking at insolvency law through the lens of the theory of other (legal) disciplines. Introducing authors are Vaccari and Van Ho (Human rights), Hardman (Company law), Madaus (Contract law), MacPherson (Property law), and Ghio (Psychology). The re-examination of insolvency law (as per the title of the book), therefore, takes place by deeper research into the philosophical background and basis of insolvency law, the further deepening of ideas about insolvency law itself and through the lenses of other areas than specifically insolvency law. There will be quite a number of legal philosophers, theorists and scholars from other disciplines than insolvency law, which will take an interest in the book.
Before looking at a few of these contributions, allow me an aside. In the Netherlands, 50 years ago, civil law and commercial law were still governed by more than almost 150 years old legislation that was a nearly literal translation of the French Codes. Only by 1992, the legal system had freed itself from this historical baggage. In the early 70s, therefore (?), topics such as methodology and theory were treated poorly in Dutch law schools. The emphasis was on knowledge of the historical origins of the rules the country wishes to replace and the most desirable arrangements in a country that, for centuries, its economy had seen functioning its laws in an open, internationally oriented environment. Some topics, as discussed in the book under review, were in its infancy, or still unarticulated: feminism, successor liability, vulnerability, human rights. Purpose and scope of insolvency law was framed not in economic dogma’s, rather in one-sided views of creditors rights, especially secured rights (‘immune’ of insolvency) and procedural rights. That was the French legacy that long left its mark. In essence going back to Roman law, emphasising creditor rights, creditor control and creditors satisfaction. In the early 80s, still, insolvency law (then the ‘bankruptcy’ version, i.e. a business liquidation) was placed under civil procedural law, as one of the several special procedures.
In universities that was also a ‘chair battle’, because the professor of procedural law claimed this as his area. I know Dutch universities where this idea was followed by a majority of faculty decision-makers until the beginning of the 21st century. Going beyond these narrow confines and its accompanying case law was rather undermined. It went to the leftovers bin, such as ‘Encyclopedia’ or were, for example, taught in subjects such as ‘legal philosophy’. Dworkin and Rawls are from after I graduated (1974). But who, as a young, hardworking lawyer, has time (and peace) to read their works during their first job? In these days, too, many (Western-)European countries were civil law jurisdictions, where ‘legislation’ (hard law) is king. Four decades ago, looking at insolvency legislations in many countries, its core was related to formal (procedural) proceedings, focussing on assets and on liquidation, managed by ‘liquidators’ (remember the term from the European Insolvency Regulation 2000?), now named ‘insolvency practitioners’ (IPs), in a proceeding full-blown controlled by courts and focusing on the interest of creditors. Perhaps this historical burden can explain why thinking about insolvency law started so late in (continental) Europe. This may also partly explain why (as the editors do state) outside of the USA it has remained quieter in discussing insolvency law from a theoretical standpoint.
OK, that’s all history. What about the future? When I started 25 years ago my (in the meantime 11 volumes, in a 5th edition) Dutch series ‘Wessels Insolventierecht’ (= Insolvency Law), in the first paragraph of Volume I, I took a radical different approach: no procedural framework, no one-sided creditor-orientation, no one-sided economic dogma (as in American scholarly scholarship regarding law and economics). Indeed, and quite rightly, the editors refer to the debates of American scholars since the 1980s, leading to an oft-repeated handful of approaches and theories, preferably with capital letters, apparently to reinforce the propagated theory: Creditors’ Bargain Theory and some 10 others. No, my starting point is not ‘persons’, rather ‘relationships’. I wrote: Insolvency law deals with the existence of legal relations (of different nature), with all who may have an interest in what happens with the debtor. Insolvency law flows from the existence of a national legal framework the core content of which concerns the prevention, regulation and administering of discontinuity in legal relationships of persons who have legal rights and duties (companies or natural persons) and find themselves in financial difficulty. The essence of the legal domain of insolvency law is the avoidance or streamlining of (the consequences of) the inability to fulfil payment obligations. Consequently, in an international context, international insolvency law is also concerned with certain contractual arrangements (e.g. cross-border private arrangements or ‘work outs’), including the recording of ‘best practices’, because the development of hard law goes so slow. It is not only (see the contributions of Omar and Tribe) the need to repay a debt to a creditor to redress the inequality in a bilateral legal-financial relationship, it’s also about restoring and maintaining equality in a larger group of stakeholders.
The description of insolvency law I gave is open and flexible enough to include the developments of, say, the last 25 years, with a shifting paradigm: from hard-creditor oriented, court-driven, asset-focused proceedings moving to less formal (quasi-contractual) procedures, focussing on debts and their restructuring, managed by the debtor itself, sometimes guided by IPs and a short confirmation phase for the courts. Basic assumptions underlying bankruptcy legislations (initially all ‘liquidation’ proceedings), working well for liquidation, are being rethought and criticized. New practical questions are being discussed. Many aspects of restructuring cannot meaningfully be solved by applying rather ancient ideas and legislation. Not only clashing swords (absolute rights; holdout creditors; absolute ‘Nein’-sayers), but also room for compassion. The position demanded with full force by certain rights-holders can be put into perspective or set aside where there are reasonable grounds for an exclusion or a deviation and the interests of these rights-holders (wider: creditors or shareholders) are not prejudiced as a result thereof. That is of course a rather narrow margin. The search is for the points of interest, points of view and the principles that determine this margin and can further flesh it out. Can we seriously discuss and weigh the interests of all stakeholders’ interests involved in a restructuring (continuation of financially viable companies), with rules and principles that are based on legislations in which the interests of creditors are so centrally cemented?
The book announced here stresses the important role that legal theory can play in the development or the renewal of insolvency and restructuring laws. The contributions can sharpen our ideas. Potamitis and Paparrigopoulos take the Preventive Restructuring Directive (EU Directive 2019/1023) to test it against the ideas provided by Rawls. In short, Rawls – in my words – arranged his principles of social justice in order of their priority. The first principle (‘fundamental freedoms”) takes precedence over the second principle. The first part of the second principle (‘fair equality of opportunity’) takes precedence over the second part (‘the difference principle’). They conclude that the Directive is inspired by Rawls’ ideas, and can be better understood and interpreted if seen to reflect not only principles of fairness and equal treatment, which go well beyond requirements of efficiency. There is a certain satisfaction in reading what I already had been thinking. The development history of the Directive shows that many different interests (in addition to those of creditors) played a role. Even in the Expert Group assisting the European Commission next to independent members, also representatives of special interests (employees, banks) were involved on the same footing in the consultation on proposal texts. The final texts reflect the mutual relationships that exist between all different stakeholders.
I take the legal relationship between the debtor and each individual creditor, in its connection with other relationship as a starting point. Then, in my view, some views expressed result in their unusability for a sound theory. For example, a theory focusing on one single interest of one single person or group of persons (e.g. the Creditor Bargain Theory). Such approaches are inadequate to provide a satisfying solution. If I understand her well, this also seems the case with the contribution of Jacobs. She explains the ‘masculist’ approach that places ‘rights and entitlements’ as a solution to insolvency issues against the ‘… feminist ideals of connection and compassion’. This doesn’t help me. It places two subjective approaches radically against each other and I miss attention for those relationships with others than creditors. I am not opposed to looking at or taking into account a certain (supposed?) behaviour, but the shy that insolvency systems ought to have more ‘… of a “woman touch” and reflect more care, compassion and inclusion’ leads to an elusive twilight. I don’t see a balance, as I do see in the contributions of Gant (‘vulnerability’) and Vaccari and Van Ho (stressing ‘human rights’). The balance in the latter contributors, however, perhaps tips too much to the core of the subject they emphasize.
A few words on company law and contract law. Hardman is certain that the structure of company law is build upon insolvency law’s foundations. Separate legal personality, limited liability and corporate purpose arise due to insolvency concerns or, in relation to corporate purpose, can be reconciled by bowing to insolvency law. In practice, however, one sees that ‘insolvency law’ is not so determinative as I understand the author sees it. In individual corporate legal entities, but many times within corporate group structures, ‘insolvency’ is just taken into account along the way or come (mandatory) when making a choice for a certain type of corporation. A legal entity is chosen to have a better insight in the entity’s operations and its financial aspects (investments, running costs, financial margin). A division of assets in a certain way and allocating these in separate entities can be the result of a choice of the original founder/owner/sole shareholder to maintain peace in the family between two sons who are ambitious to be seen as the successor of the founder/father. In global corporate structures legal entities are chosen in one country just for operational or efficiency purposes. I remember from 2006 Eurofood IFSC Limited, an Irish company, limited by shares, part of the Parmalat SpA group, a company incorporated in Italy. Eurofood’s principal objective was only the provision of financing facilities (issuing bonds in 3 South-American countries, as I do recall well) for companies in the whole Parmalat group and to channel monies received to the holding companies. That insolvency serves as ‘backdrop that frames corporate law issues’, therefore, is a statement that certainly deserves further discussion.
Madaus continues his search for the boundaries of the field of insolvency law. After all, the last two decades new procedures pop up, that makes us wonder. There are procedures that have various characteristics that make one doubt whether they can be subsumed under ‘insolvency law’. They are not ‘proceedings’ (rather sort of negotiations), are not ‘collective’ (just affecting a part of the creditors), are not ‘public’ (fully or partly confidential) and are not or not entirely focused on incapacity of payment. Some doubt whether such proceedings are within the confines of insolvency law (Eidenmüller), others (Mokal) defend that such proceedings respond to the needs of insolvent debtors anyway and should be regarded under the umbrella of insolvency law. An example could be the very recent case of 4 companies in the cement industry (2 from Brazil, one from the Netherlands en one from Spain), forming Chapter 15 debtors, in a jointly-administered protective injunction proceeding in support of a Brazil court supervised interim mediation process that is in furtherance or in preparation of either a Brazilian extrajudicial proceeding (‘recuperação extrajudicial’) or a Brazilian judicial reorganization (‘recuperação judicial’). On 17 July 2024, Judge Martin Glenn (US Bankruptcy Court for the Southern District of New York) temporarily recognised this Brazilian launched mediation including a related 60-day protective injunction. This mean that the mediation in a pre-phase is recognised as a ‘foreign main proceeding’ under USA’s enactment of the UNCITRAL Model Law CBI. I guess Madaus would oppose to this.
We have to go back to the drawing board. A clear definition of insolvency law, Madaus submits, is only possible with a clear understanding of the phenomenon of restructuring. First establish the boundaries of restructuring, only then talk about ‘insolvency law’, the relationship between restructuring and insolvency and the possible applicability of insolvency law frameworks on matters of restructurings. The outcome of his considerations is that restructuring law is not a part of insolvency law, nor merely a part of company law or contract law. No, it is a separate field of law fulfilling a specific set of tools and guided by a specific set of principles. This direction appeals to me. Sometimes one hears the claim: restructuring under the shadow of insolvency law. That is strange in itself, because restructuring is separated from the aim of avoiding (traditional) insolvency. It also betrays unfamiliarity with restructuring. Madaus rightly emphasizes that continuing restructuring focusses on the adjustment of existing legal rights and obligations. In reality, the week-in-week-out managing of operations involve daily adjustments of a multitude of legal relationships to other legal subjects (other entities, such as debtors, creditors, or employees) or assets (sale of certain assets such as cars or stock or shares in a single subsidiary).
Thinking further restructuring could characterise as a specific contract. In the Netherlands that would deserve an elaboration in Book 7 Civil Code. The most special thing is then a court conformation to the negotiation result of the parties. The special rights and obligations of those parties, and the consequences of acting contrary to them, can be described in principles or rules borrowed from other areas of law, including insolvency law. What this train of thought leads to is that I will confront my general description of 25 years ago of what ‘insolvency law’ entails in a next edition with the further elaboration of ‘restructuring as an independent, autonomous legal area’.
This publication will certainly be welcomed by academics and students interested in insolvency and restructuring (sometimes: rescue) law. In scope it is wide enough to think that it will be of interest for readers around the globe. Legal professionals and practitioners specialising in insolvency law will be enticed in as far as a rather uncommon way of thinking about day-to-day practical problems could broaden their perspectives. It may also be a welcome book for staff of national or European of other regional legislators. Theoretical concepts, philosophical considerations and unexpected perspectives from other fields may inspire them to develop fresh insights.
The editors should be congratulated with this collection of assembled thinking about the principles and underlaying theories in relation to the law of corporate insolvency and restructuring. It makes you think about the perspectives of your own work and the work of your fellow scholars. I also think that the contributions will make many people think that in their work they may have followed too blindly the work of American scholars. The single-minded, financially oriented accent on the interests of creditors is poorly aligned with aspects and desiderata that also need to be addressed in any restructuring or insolvency. Insolvency is an accessory system that builds on and gains meaning by understanding the underlying legal relationships and social connections. The addition of a theoretical analysis is long overdue, partly because of the intellectual challenges of combining theory with doctrinal clarity. The ideas and thoughts that the writers bring together and develop are inspiring and eye-opening. For this reason alone, the book – a first step towards independent theory development – is a welcome contribution to scholarship.
Bob Wessels
Professor em. University of Leiden
[July 2024]
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Published as BOOK REVIEW in: International Insolvency Review (Wiley)
Re-examining insolvency law and theory: perspectives for the 21st century. By Edited by Emilie Ghio, John Wood, Jennifer Gant (Eds.), (1st ed) Cheltenham: Elgar. 2023. pp. 312. £115. ISBN: 978-1-80392-875-3
Bob Wessels
First published: 03 September 2024
https://doi.org/10.1002/iir.1545