The COVID-19 crisis has encouraged many countries to amend their bankruptcy laws. In many cases, these amendments took place temporarily — especially during the hibernation phase of the pandemic. In other countries, however, the pandemic has led to permanent changes in their insolvency legislations. More importantly, the COVID-19 crisis has encouraged many countries around the world to reassess the desirability of their insolvency and restructuring frameworks. This assessment has resulted in various trends and discussions that are expected to reshape the future of insolvency law in a post-pandemic world.
In terms of trends, the pandemic has accelerated two types of reforms: the adoption of special insolvency frameworks for micro-, small and medium-size enterprises (MSMEs), and the implementation of hybrid (or pre-insolvency) restructuring proceedings — especially in countries with inefficient insolvency frameworks.
Prior to the COVID-19 crisis, some countries around the world, such as the U.S. and Myanmar, adopted special insolvency rules for MSMEs. Moreover, the design of special insolvency rules for MSMEs was already in the agenda of various international organizations such as the World Bank and UNCITRAL. Since the pandemic started, however, many other jurisdictions, including Australia, Colombia, India and Singapore, have adopted permanent or temporary frameworks for MSMEs. In the near future, it is expected that these frameworks will be adopted in more countries around the world.
The adoption of hybrid procedures also started some years ago. Namely, the approval of the European Directive on Preventive Restructuring Frameworks and the modernization of the scheme of arrangement in Singapore represented two major steps for the promotion of these procedures, which combine the advantages of workouts (especially in terms of flexibility, low stigma and the ability of the debtor to lead the restructuring process) with the attractive restructuring tools existing in U.S. chapter 11, including an automatic moratorium, a cross-class cramdown, debtor-in-possession (DIP) financing and the restriction of ipso facto clauses. In some countries, such as the U.K., Germany and the Netherlands, the COVID-19 crisis has accelerated the implementation of this hybrid procedure that was already in their political agenda. In the following years, it is expected that more countries will follow this trend either because they are required to do so (e.g., EU Member States) or because the inefficiency of their traditionally insolvency frameworks will encourage them to embrace these hybrid procedures.
Finally, while not necessarily leading to permanent changes in insolvency law — at least, so far — the COVID-19 crisis may encourage countries to rethink the desirability of various controversial rules existing in some jurisdictions. These rules may include (1) the duty to initiate insolvency proceedings mainly existing in Europe, (2) the subordination of shareholder loans, primarily found in various countries in Europe and Latin America, and (3) the appointment of an external administrator replacing the directors once a company enters a formal insolvency proceeding, as it generally occurs in the administration/judicial management procedure existing in many common law countries, including the U.K. and several jurisdictions in Africa, the Middle East and the Asia-Pacific region. Additionally, it may induce countries to adopt more attractive restructuring tools, such as cramdown provisions, fast-track procedures for reorganizations and going-concern sales, and the availability of rescue financing. In fact, the adoption of these tools has been observed in recent insolvency reforms taking place in Europe, Asia and Latin America.
Of course, countries modernizing their insolvency frameworks still may face many challenges. For example, they need to make sure that even if they improve the attractiveness of their restructuring frameworks, the insolvency system remains protective of the interests of the creditors. Otherwise, lenders may become reluctant to extend credit, ultimately harming firms’ access to finance and the promotion of economic growth. Therefore, the reform may end up doing more harm than good. Additionally, many countries (especially emerging economies) face significant challenges mainly associated with the improvement and the development of the market and institutional capacity needed to build a well-functioning insolvency system. Despite these challenges, however, it is heartening to see many exciting developments taking place in the international insolvency space. Therefore, even though nothing will help us repair the devastating social and economic effects generated by the COVID-19 pandemic, it seems that, at least in terms of insolvency law, we will be able to emerge stronger.