The Role of the Court in Debt Restructuring

Abstract

This paper examines the intervention of the law, and the role of the court, in debt restructuring. The law has a role both in imposing constraints on creditors and in seeking to ameliorate the potential abuses that can arise from such constraints. Three potential forms of abuse are examined: the imposition of a restructuring on dissenting creditors, which introduces the potential for wealth transfers between creditors; the imposition of a moratorium while a restructuring is negotiated, which might lead to misuse of the process by managers wishing to prop up companies which are not viable, or may allow managers of viable businesses to ‘shake off’ liabilities that the company is capable of servicing; and the imposition of debtor-in-possession arrangements, which raise the potential for new creditors to be preferred at the expense of existing creditors. It is argued that the court’s role in protecting creditors from these three forms of potential abuse is vital, although the nature of that role differs according to the form of abuse. Detailed recommendations as to the court’s role are put forward in the paper. Recent debt restructuring reform proposals in both the UK and the EU, which adopt very different approaches to the role of the court in this process, are examined in the light of this discussion.