Bankruptcy stigma and the second chance policy: the impact of bankruptcy stigma on business restructurings in China, Europe and the United States

Abstract

This paper deals with a topic of common concern to China, Europe and the United States: the negative effects of bankruptcy stigma on the second chance (fresh start) policy encouraging restructuring of businesses as an alternative to their liquidation. In most Continental European civil law systems, for example, business restructurings are still only aspirations rather than reality. This is to a great extent due to the ubiquity of intense bankruptcy stigma as a consequence of what, for example, creditors as well as the directors and officers of the bankrupt debtor avoid participating in restructuring proceedings. The resulting dominance of liquidations is perceived as a competitive disadvantage both for China and Europe compared to the United States that possesses the top model enshrined in Chapter 11 of the US Bankruptcy Code. It was for these practical reasons that the second chance policy was given clear priority by the European Union as best expressed in the Commission Recommendation of 12 March 2014 on a New Approach to Business Failure and Insolvency. Similar policy shift characterizes the 2007 Enterprise Insolvency Law of the People’s Republic of China as visible from Chapter 8 on reorganisation and Chapter 9 on compositions (workouts). While bankruptcy stigma is present also in the United States, its effects are the least “biting” in this country and are an issue primarily in the context of consumer-bankruptcies. In light of the above, this article’s main claim is that without proper understanding and acknowledging the impact of bankruptcy stigma, hardly could lawmakers’ efforts aimed at forging a legal environment that would incentivize restructurings of financially distressed businesses yield success. Although some research on the topic is available, it tends to be focused on consumer bankruptcies only. A comprehensive, empirically based, inter-disciplinary scrutiny of the impact of stigma on business reorganisations is still lacking just like a “handbook” for combating the bankruptcy stigma. This article attempts to open the doors to this new inter-disciplinary area of law with the tools of comparative law. Besides canvassing the pertaining scholarship’s hereinbefore achievements, the paper extends also to such so far neglected niches of the globe as China and the post-socialist countries of Central and Eastern Europe.