The Role of Firm Viability, Creditor Behavior and Judicial Discretion in the Failure of Distressed Firms under Court-Supervised Restructuring: Evidence from Belgium

Abstract

Unlike Chapter 11 in the U.S., the Belgian reorganization legislation requires that distressed firms remain under court-supervision during plan execution. In principle, the court-supervised post-confirmation stage takes a fixed period of 24 months. Using a unique sample of small Belgian firms, we analyze both the likelihood of failure and the time spent before transfer to bankruptcy-liquidation during this post-confirmation stage. More profitable debtors are less likely to fail. If banks are secured by collateral with high liquidation value, debtors are more likely to fail. The mandatory repayment of government debt, like unpaid taxes and social contributions, also renders the distressed firm more likely to fail. Judicial discretion sharply affects the likelihood of failure in a subsample of individual debtors seeking to preserve a sole proprietorship.