Leaving the Shadows of US Bankruptcy Law: A Proposal to Divide the Realms of Insolvency and Restructuring Law

Abstract

Insolvency law used to be a set of rules that govern the way a debtor is treated once he became insolvent and stopped trading. Certain mechanisms respond to this incident in order to safeguard a fair treatment of all creditors and other stakeholders with the aim of minimizing the damage. Modern insolvency laws do more. They have been endowed with tools that shall allow for a restructuring of the business of the failing debtor, often combining the common tools of insolvency law, e.g. a collective stay, with new tools to facilitate a restructuring agreement. But why wait until a debtor is insolvent? The idea of early redress to a business failure has led to a number of legislative pre-insolvency initiatives that make such tools available to debtors that are not yet insolvent. The result is a mixture of insolvency and restructuring law that has grown guided by practical needs rather than doctrinal approaches. In this paper, a doctrinal approach is proposed that offers a clear distinction between insolvency and restructuring law. Based on the description of the debt cancellation effect as the common function of all insolvency and restructuring proceedings, the different mechanisms that both types of procedures use lead to a clear categorization of insolvency and restructuring proceedings and their governing law and principles.