Bail-outs and Bail-ins are better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress

Abstract

COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more 'lockdowns', multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the way in which they treat the cohort of newly bankrupt businesses. In jurisdictions where a well-functioning reorganisation procedure is capable of producing value-maximising outcomes in normal conditions, the temptation may be to subject this cohort to treatment by such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor 'fit' for the treatment of COVID-19 distress. In our view, the more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor's liabilities, or a class thereof), or some combination of the two. In this paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shutdowns , and compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by tentatively suggesting some principles to help guide the choice between bail-ins and bail-outs, and the design of either form of intervention.

Governmental responses mitigating the impact of COVID‐19 on small and medium‐sized enterprises and the case for insolvency law reforms in Hong Kong

“…In jurisdictions that imposed 'lockdowns' or restrictions of movement, governments have mitigated the impact of business disruptions through three main responses: economic measures (also known as bailouts), legislative changes to relieve contractual obligations 1 and insolvency law reforms to facilitate corporate rescues. 2 Insolvency law reforms include those that are specific to SMEs which are advocated by global organizations (e.g., the World Bank 3 and the United Nations Commission on International Trade Law), 4 as well as temporary reforms that have ended or are in the process of winding down. 5 Several advanced common law jurisdictions, such as the United States, Australia and Singapore, have implemented a variety of measures that apply to SMEs, including economic schemes, mandatory relief of contractual obligations and insolvency law-related reforms to facilitate corporate rescues.…”

Restructuring Lessons from the Covid Pandemic: Bail-Out vs. Market Approach

“…Van Zwieten et al (2020) stating that 'bail-outs and bail-ins are better than bankruptcy′ (title) and'[r]elative to use of the formal reorganisation law, however, such strategies may work better to reduce the amplification of the COVID-19 shock, by tailoring relief to the particular features of COVID-distress while preserving the integrity of existing reorganisation procedures', p 39. See alsoEidenmüller (2023), commenting on this paper.…”