The Future of Reorganization Procedures in the Era of Pre-Insolvency Law

Abstract

Several countries and regions around the world, including Singapore, the United Kingdom, and the European Union are amending their restructuring framework to implement a pre-insolvency mechanism that includes most of the features existing in the US Chapter 11. However, unlike what happens in the United States, where unsuccessful reorganizations lead to Chapter 7 liquidations, companies using this ‘de facto Chapter 11’ (DFCH11) will be still allowed to use formal reorganization procedures. This paper argues that, while the rise of the DFCH11 is not necessarily undesirable provided that various protections are put in place, jurisdictions implementing this restructuring tool need to adapt their formal insolvency framework to this new era of ‘pre-insolvency law’. Otherwise, some inefficiencies can be created from the lack of coordination between insolvency and pre-insolvency law, since non-viable firms as well as viable businesses managed by the wrong people can opportunistically delay the commencement of a liquidation procedure even when it is the most desirable outcome for the creditors and society as a whole.