The Future of Insolvency Law in a Post-Pandemic World
By Aurelio Gurrea-Martinez (Singapore Management University)
The COVID-19 crisis has encouraged many countries to amend their insolvency laws. In most 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 the insolvency legislation. More importantly, the COVID-19 crisis has accelerated the insolvency reforms already existing on the political agenda of many countries, and it has encouraged other jurisdictions to reassess the desirability of their insolvency and restructuring frameworks.
In a recent article, entitled ‘The Future of Insolvency Law in a Post-Pandemic World’ (available here), I analyse various trends, reforms and policy discussions probably reshaping the future of insolvency law.
First, prior to the COVID-19 outbreak, various jurisdictions, such as the United States and Myanmar, adopted special insolvency rules for MSMEs. Moreover, the design of simplified 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, especially after the publication of the new section for MSMEs included in the revised version of the World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes, as well as the approval of the legislative recommendations for the adoption of simplified insolvency frameworks for MSMEs by UNCITRAL.
Second, the pandemic has also accelerated the adoption of ‘hybrid procedures’ – that is, restructuring procedures usually combining elements from both informal workouts and formal insolvency proceedings. Indeed, while the adoption of these procedures was already on the political agenda in many countries (e.g., United Kingdom) and regions (e.g., European Union), the COVID-19 crisis has accelerated the implementation of hybrid procedures, as shown by the adoption of the new restructuring plan in the United Kingdom, and the new restructuring frameworks in Germany and the Netherlands. In other jurisdictions, such as Colombia, a hybrid procedure has been temporarily adopted as a response to the pandemic. Finally, other jurisdictions, including Australia, have announced that they are assessing the possibility of adopting a moratorium and other restructuring tools in their scheme of arrangement, as Singapore did in 2017. In the following years, it is expected that more countries will keep adopting hybrid procedures either because they are required to do so (e.g. EU countries) or because the stigma and inefficiencies of their formal insolvency frameworks will encourage them to embrace these procedures.
Third, the COVID-19 crisis has encouraged many countries to facilitate workouts. Even if the pandemic leads to the improvement of many insolvency systems, using the formal insolvency or restructuring framework can still be costly. Therefore, it is expected that, in a post-pandemic world, countries will continue to promote workouts, and this strategy will be even more desirable in countries with inefficient insolvency frameworks, as it generally occurs in emerging economies.
Fourth, many MSMEs are not incorporated. Even if they are, the shareholders/managers often guarantee the company’s debts. Therefore, in practice, they are exposed to unlimited liability. Even though the empirical literature has evidenced the economic benefits associated with the adoption of a discharge of debts for honest but unfortunate entrepreneurs, many countries around the world –especially emerging economies– have not fully embraced this policy yet. The recent push for the adoption of a fresh start policy for individual entrepreneurs, especially as part of the reforms for MSMEs suggested by the World Bank, the International Monetary Fund and UNCITRAL, is expected to encourage more countries to adopt this reform. In fact, some jurisdictions traditionally reluctant to this policy, such as China, have recently adopted –so far, only in Shenzhen– a new personal insolvency regime facilitating a discharge of debts for individual entrepreneurs. It is expected that more countries will follow this trend in a post-pandemic world.
Finally, while not necessarily leading to permanent changes in insolvency law, the COVID-19 crisis may encourage countries to rethink the desirability of various controversial rules existing in some jurisdictions, such as the imposition of strict directors’ duties in the zone of insolvency, the subordination of shareholder loans, the appointment of an external administrator to manage the debtor's property and business affairs in administration-style insolvency proceedings, and the lack of an attractive framework for debtor-in-possession (DIP) financing.
Countries modernizing their insolvency frameworks will face several challenges. First, 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 respond with an increase in the cost of debt, ultimately harming firms’ access to finance and the promotion of economic growth. Therefore, an insolvency reform initially seeking to support the real economy may end up doing more harm than good. Second, many countries (especially emerging economies) still need many reforms and educational efforts to improve their market and institutional environments. Third, even though the rise of new technologies is bringing many opportunities for the insolvency industry, it is also creating many challenges that will need to be addressed in the coming years.
Despite these challenges, however, it is expected that, due to the reforms and enriching policy discussions taking place in times of COVID-19, the attractiveness of many insolvency systems will be significantly improved in a post-pandemic world. Therefore, it seems that, at least in terms of insolvency and restructuring laws, the COVID-19 pandemic will help us emerge stronger.