As reported in the Wall Street Journal, bankruptcy laws across Europe, particularly in France, Germany, Spain and Italy, are going through a makeover, and the model that is being used is Chapter 11 of the US Bankruptcy Code. Until now, the vast majority of European insolvency cases ended in liquidation rather than with the company getting a fresh start. European laws were cumbersome and punitive, especially to entrepreneurs. As one restructuring lawyer puts it, “for the bulk of Europe, the only way to do a restructuring was to avoid insolvency proceedings (and do an out-of-court restructuring instead), while in the US, in order to get a restructuring done, you start off by going into Chapter 11.”
Why are the changes happening now? For one, the high volume of distressed businesses in Europe has exposed holes in European bankruptcy laws. Moreover, the changes seem to be preemptive in advance of the expected spike in bankruptcy cases as a result of the wave of debt refinancing that needs to take place in Europe over the next three years at a time when banks are struggling.
The changes in the laws are centered around importing elements of Chapter 11 previously unheard of in Europe – fresh financing, “cram downs” of debt restructuring on reluctant creditors, and debt-for-equity swaps that could open the door to new investors. While these changes have resulted in an increase in filings already, there is still much more of a stigma about bankruptcy in Europe than there is in the US, and it may take a while before the concept of bankruptcy for the purpose of restructuring becomes as commonplace in Europe as it is here in the US for distressed companies.