The Singapore Ministry of Law has launched a public consultation on some proposed personal insolvency amendments, and one in particular struck a nerve based on the disaster of BAPCPA: “MinLaw proposes to introduce a new criminal offence which criminalises the soliciting and canvassing, in the course of any business, of any person to make a bankruptcy application.” The proposed punishment is a S$10,000 fine, three years in jail, or both! The justification for this aggressive proposal is a supposed “increase in the number of debtor-initiated bankruptcy applications where debtors borrow irresponsibly to pay for … consultancy firms’ services in helping them apply for bankruptcy” with the supposed intent of “abusing the [debt repayment scheme] to obtain a discount off their debts.” Sound familiar? This is reminiscent of section 526(a)(4) of the US Bankruptcy Code, introduced in the 2005 disaster, that forbids “debt relief agencies” to “advise an assisted person … to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer” for preparing such a filing. (more…)
Category: Comparative & Int’l Perspectives
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Revision of Chinese Enterprise Bankruptcy Law Leaves Natural Persons Waiting
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The Chinese National People’s Congress yesterday began reviewing a set of major revisions to the 2007 Enterprise Bankruptcy Law. Details on this first major reform effort in nearly 20 years are not publicly available (!), but Xinhua reports that it involves more than 160 new and revised provisions on such topics as post-filing property transfers, optimizing reorg provisions, “and enhancing judicial cooperation in cross-border insolvencies”. This all sounds promising. What’s not mentioned? A long-awaited and much-debated national rollout of personal bankruptcy. Pre-eminent bankruptcy scholar Li Shuguang has characterized the current enterprise-only approach as “only half of a bankruptcy law,” and he had earlier noted that “c]onditions for introducing a personal bankruptcy system are now largely in place, [including] improved institutional frameworks, shifting societal views, and local pilot programmes” in such places as Shenzhen and Wenzhou, among others. Nonetheless, despite a worrying rise in consumer debt and accompanying social tensions, national authorities continue to resist introducing proper treatment protocols for the personal (and small business) side of the bankruptcy hospital.
Another pre-eminent Chinese bankruptcy scholar years ago taught me a proverb that captures this situation perfectly (as 4-character chengyu distillations of Chinese wisdom so often do): 因噎废食 (yin ye fei shi), meaning “not eat for fear of choking.” This phrase encapsulates the danger of being overly conservative about engaging in beneficial behavior due to fear of some possible but unlikely bad outcome. Personal bankruptcy reformers around the world have faced these very fears over and over during the past 30 years (especially but not exclusively in Europe), and the bad outcomes have been muted if not entirely absent. It’s time for China to stop starving its increasingly consumer- and small-business-dependent economy due to fear of bad societal effects of treating natural persons’ insolvency. But for now, it seems China’s overindebted consumers and small entrepreneurs will have to continue to wait.
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Bulgaria finally adopts personal insolvency law
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At long, long last, Bulgaria yesterday finally became the last EU Member State to adopt a personal insolvency law (Malta's law, effective late last year, seems to provide relief only for entrepreneurial debts, but it technically extends relief to individuals owing such debts, which is all the relevant EU Directive requires). To say the Bulgarian parliament adopted this law begrudgingly would be a significant overstatement of the enthusiasm for this new procedure–after many years of resistance, Bulgarian lawmakers seem to have relented under financial pressure from EU authorities. "Begrudgingly" also seems to be an apt characterization for how the new law offers debt relief to individuals, given its requirements and restrictions, but we'll have to see how the law is implemented. In any case, this is a watershed event worthy of note.
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Elon’s Brazilian Corporate Law Surprise
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Elon Musk has just learned that Brazil doesn't give a lot of credence to the fictions of corporate asset partitioning: affiliated companies can be liable for each other's involuntary obligations. This shouldn't be a surprise; Mariana Pargendler's work has made clear that Brazil's got a very different approach to corporate law than the US. In particular, limited liability isn't so strongly fetishized. Now if we only had some sort of legal doctrine in the US that ignored limited liability…
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Man Bites Dog, or Debt Collector Restructures Its Distressed Debt
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I couldn't let this one pass without noting it. The largest debt collection company in Europe has found itself on the other end of the dunning letter. Swedish debt collection company Intrum has achieved majority (barely) support for a deal with bondholders to swap 10% of its $5.8 billion debt for equity and push out the maturity of remaining notes. Intrum found itself in this mess after "years of borrowing heavily in the low-interest era to buy portfolios"–that is, to buy bunches of distressed debt owed by strapped borrowers all over Europe, which Intrum would then squeeze for repayment at a higher rate than Intrum had paid. Or so Intrum hoped. Apparently this investment strategy went sour after "a slowdown in its business." Hmmm. What an interesting euphemism! Borrowers resisting collection pressure more resolutely now? I wonder if the growing wave of personal insolvency procedures across Europe has contributed to this "slowdown" for Intrum's debt collection efforts. Good news for borrowers is bad new for the debt collector!
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Long-run (positive) effects of personal debt relief
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Empirical papers on the long-run effects of a personal bankruptcy relief system (i.e., discharge) are rare, so this fascinating new paper caught my eye. The first personal insolvency discharge system in continental Europe appeared in Denmark in 1984, and this paper takes advantage of that long lifespan to mine some rather unique data. The results are unsurprising but very useful in the ongoing debate about the salutary effects of such procedures: "debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling." So the benefits of debt relief are not only substantial but robust, as debtors learn their lesson (if there was one to learn) about managing their finances, and they capitalize (literally) on their fresh start. Perhaps most important, the cause of these effects seems to be largely the desired result of any personal discharge system–getting debtors out from under the debilitating thumb of hopelessly unserviceable creditor demands and reactivating them as engaged workers and taxpayers: "The net transition of workers into employment accounts for two thirds of the increase in earned income." Great contribution to the literature on personal insolvency and well worth a read.
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Cross-Border Insolvency Forum Shopping Naivete
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by Ted Janger and John Pottow
Recently, two U.S. law professors and a third from Singapore offered unsolicited advice to the United Nations Commission on International Trade Law (“UNCITRAL”) regarding that organization’s ongoing efforts to harmonize and modernize the law of cross-border insolvencies. They wrote an open letter (the “Letter”) to the Secretariat—joined by a number of other academic signatories—that calls upon UNCITRAL to abandon one of the core principles of its Model Law on Cross Border Insolvency (the “MLCBI,” adopted as chapter 15 of the U.S. Bankruptcy Code): that, other things being equal, a cross-border bankruptcy case should be based where the debtor is located.
This principle is implemented by according special deference and comity to the insolvency case located at the debtor’s center of main interest (the “COMI”). The debtor’s COMI is the jurisdiction where it carries out its activities and, hence, is the jurisdiction that is known and readily apparent to third parties. It therefore is predictable. The COMI principle thus has a lot to recommend it. In most cases it will enhance the legitimacy of bankruptcy outcomes by simultaneously furthering administrative convenience, increasing transparency, vindicating creditor expectations, and respecting national sovereignty. Like most rules of private international law, it is rooted in common sense.
Notwithstanding COMI’s many virtues, the Letter’s authors recommend jettisoning COMI in favor of a regime of unfettered forum choice and jurisdictional competition; the main proceeding entitled to deference in a multinational insolvency should be freely selected by the debtor.
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Creative Destruction in Small Business Bankruptcy
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Two distantly related items caught my eye this morning, as both reinforce the need for "creative destruction" as a response to all-too-common small business failure.
The first was a NYT piece on the travails of a female entrepreneur in China. It tells a heart-wrenching story of a system in which the state brutally represses honest but unfortunate debtors, including via the infamous blacklist that prevents defaulters from using air and train travel (effectively curtailing re-entry into business, even if financial and economic factors might otherwise allow this). This is a story about what it looks like when there is no bankruptcy backstop, no reset button to start fresh and undertake a new venture with the hard lessons of failure firmly in mind.
The other item explores the transition from such an unforgiving system–in Spain–after the introduction of a discharge for (most) small business debt. The linked Bank of Spain working paper offers further evidence of the salutary effects of small business bankruptcy that discharges individual entrepreneurs and encourages them to restart. The reform fostered the "creative destruction" of these entrepreneurs' ventures, with the failed firms exiting the market (rather than lingering as productivity-depressing zombies), which "leads to technological change and higher productivity growth" as "the introduction of the fresh start policy promoted firm creation among Spanish micro-firms, especially in companies with a high share of intangible assets, which are likely to be involved in innovation activities, and in sectors with high productivity." Nicely linking the two contrasting accounts from China and Spain, the Bank of Spain paper concludes, "This finding also suggests that a starkly pro-creditor personal bankruptcy law with no real fresh start, like the Spanish one before 2015, may be an important barrier to entry for small businesses." Indeed.
It still surprises me that lawmakers around the world continue to resist this long-established truth for small business, powerfully undermining the most important driver of economic development worldwide. Worse yet, the mere introduction of a personal bankruptcy law with a debt discharge is not enough–the system actors have to actually support a fresh-start policy rather than actively undermining it, which turns out to have been the disappointing result of the first two years of such a system in Shenzhen, China. One hopes that national legislatures, like small entrepreneurs, can learn from failure and move forward with proper personal bankruptcy laws when given a fresh opportunity to do so.
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New Year, New Personal Bankruptcy Law–in Kazakhstan
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The list of countries with new personal insolvency laws continues to grow. Bloomberg noted today that the President of Kazakhstan had signed a new law setting out several procedures for relieving the debts of non-entrepreneur individuals (sole proprietors remain relegated to the existing law on rehabilitation and bankruptcy). The text of this 30 December 2022 law is here (in Russian only), and most of its provisions will become effective in 60 days, around March 1, 2023.
The structure of this law and its four pathways to relief are clearly inspired by the 2015 law of Kazakhstan's northern neighbor. This indicates a continuing trend, as new personal insolvency laws are generally based on a model from the law of a country the adopting country respects, and the model in this case is a fairly good one (the parent law is described here and here). The Kazakh law differs in some respects from this predecessor model, but the basic system is the same: (1) a no-asset procedure ("out-of-court bankruptcy") providing a simple discharge to debtors with debt below about $11,000 (i.e., 1600 "monthly calculation units," which for 2022 was KZ₸3063, just over US$7, so 1600 x $7 = $11,200), (2) a 5-year payment-plan procedure ("restoration of solvency") for debtors with regular income who choose to propose a 5-year plan for court (not creditor) approval, (3) a traditional liquidation-and-discharge procedure ("judicial bankruptcy") unfolding over six months and leaving the debtor with exempt property, including a sole residence, and (4) a settlement option ("amicable agreement") for debtors who manage to convince their creditors to agree to a private compromise (read: never!).
While the requirements for accessing the no-asset out-of-court bankruptcy procedure seem wildly unrealistic and uniquely austere (no property of any kind!?), the new Kazakh system is fairly well structured. Judging by the northern neighbor's recent experience with its very similar set of procedures, it seems most likely the payment-plan procedure will be selected by very few debtors, and the courts will reject the unviable plans of the few debtors who try to pursue this route. Judicial bankruptcy will become the main pathway to relief, which seems to be within reach for ordinary Kazakh citizens. Eventually, the extremely restrictive access requirements for out-of-court no-asset bankruptcy seem likely to be relaxed–either in practice or in a first round of law reform–and that procedure will become the workhorse for the personal bankruptcy system.
Yet another laboratory to observe the effects of the messy compromises that create personal insolvency procedures–and thank goodness, yet another large population of debtors who finally have access to legal relief from debts that would otherwise hound them and their families forever, with no hope of recovery. The new year brings new hope for such families in Kazakhstan!
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Ukraine versus Russia, English Supreme Court
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Bailiffs for Gunboats is the title I have given to a short paper to be published in a Festschrift for the famous German scholar, Christoph Paulus, lately head of the law faculty at Humboldt, Berlin. It discusses a case remarkably overlooked despite its unusual facts, its major legal and political implications, and its role as a prelude to the horrors of the current war in Ukraine.
The case of Ukraine v. Russia (“Ukraine-Russia”), pending decision in the Supreme Court of England for more than three years, lies at the intersection of traditional public international law and private international law. It presents the question of court enforcement of a debt that is intertwined with sovereign political relationships. More broadly, it reflects the great power that private enforcement of a commercial instrument may nowadays give to a creditor that has goals beyond repayment. In the special context of a sovereign creditor of a sovereign debtor, the case reveals the potential role of privately enforceable debt in achieving the creditor’s political ends.