22 March, 2020

By Aurelio Gurrea-Martínez

Several jurisdictions around the world, including Australia, Germany, Spain, United States, Singapore, India and the United Kingdom have proposed or implemented changes to their insolvency frameworks.  At the same time, some academics, insolvency practitioners, and think tanks have also suggested some proposals to adapt insolvency law to the times of COVID-19.

This post summarizes a recent paper seeking to contribute to the debate by providing insolvency legislators with some policy recommendations to minimize the harmful economic effects generated by the COVID-19 outbreak. These recommendations, suggested just for companies affected by the coronavirus, include the following insolvency and insolvency-related reforms:

1.- The suspension of the duty to file for bankruptcy in countries where corporate directors are subject to this duty (e.g. Germany, Spain). This reform was suggested in a previous post published on this blog and it has been implemented in Spain and announced in Germany. However, while the German Government has suspended the duty to file for bankruptcy until 30 September 2020 (with the possibility of extending it until 31 March 2021), Spain has suspended this duty just until the end of the state of emergency (estado de alarma), that is, until 11 April 2020, even though this period can be extended by Parliament. In my opinion, the German solution seems far more desirable, since the suspension of this duty should last long enough to let companies recover from the coronavirus. And unfortunately, I think it will take time to let companies recover from the losses and financial difficulties generated by the COVID-19 outbreak.

2.- The suspension of the duty to recapitalize or liquidate companies in situations of qualified losses existing in many jurisdictions (particularly in Continental Europe and Latin America). This reform was suggested in a previous post published on this blog and it has been implemented in Spain. However, while the Spanish Government has just suspended this duty until the end of the state of emergency, I think it would be desirable to suspend it for at least one year.

3. The suspension of creditors’ rights to file involuntary bankruptcy petitions. This reform has been adopted in many jurisdictions around the world, including Spain, Turkey, Italy and, subject to certain exceptions, Germany. In Spain and Turkey, however, this reform has a very limited duration, since it will last just until the end of the state of emergency. Other countries, however, such as Australia and India, have increased the quantitative threshold required to file an involuntary bankruptcy petition by creditors. More recently, Singapore has prohibited the initiation of insolvency proceedings against debtors affected by the coronavirus subject to the protection of the moratorium. This moratorium will last for six months. In my opinion, the approach adopted in Singapore seems more desirable than those implemented in India and Australia (due to the limited effectiveness of this approach to protect debtors) and Spain (due to its limited period of time).

4.- The inability to terminate contracts and enforce security interests for a default on payments by debtors affected by the coronavirus. A similar reform has been adopted in Singapore.

5.- The inability of secured creditors to lift the automatic stay if a viable company affected by the coronavirus voluntary decides to file for bankruptcy. This restriction should apply even if the debtor is unable to provide adequate protection.

6.- A more permissive approach to rescue (or DIP) financing, even if the authorization of rescue financing affects pre-existing rights from secured creditors or administrative expense claimants. Some jurisdictions, such as Colombia, have even implemented a system of rescue financing similar to those existing in Singapore and the United States.

7. A suspension of the provisions subordinating shareholder loans existing in several jurisdictions (particularly in Continental Europe and Latin America). This reform has been implemented in Italy and Germany.

8. A suspension of the running of the lookback period in countries suspending the duty to file for bankruptcy and/or impositing a pre-bankruptcy moratorium. Similar reforms have been adopted in Germany, Czech Republic and Singapore.

9. Implementation of new rules to facilitate the commencement and management of insolvency proceedings, specially in the context of small companies. This measure has been adopted in Colombia, even though not exclusively for small companies. In the United States, the threshold to have access to the simplified insolvency rules for small companies has been expanded.

10.- A more relaxed system of liability of directors in the zone of insolvency, even considering a suspension of the liability for wrongful trading. This reform has been adopted in Australia and Singapore, and it has been announced in the United Kingdom.

Of course, these reforms will be useless if they are not accompanied by many other legal, financial, tax, and economic reforms. Still, adapting the insolvency framework to the time of the coronavirus can hopefully minimize the harmful economic effects generated by this global pandemic.

The full paper analyzing how insolvency law is being adapted (or could be adapted) to the times of COVID-19 can be found here.

About Aurelio Gurrea Martínez
Aurelio Gurrea Martínez
Aurelio Gurrea Martínez

Aurelio Gurrea Martínez is an Associate Professor of Law at Singapore Management University, where he teaches company law, financial and securities regulation, comparative corporate governance, and international and comparative insolvency law. He is also the head of the Singapore Global Restructuring Initiative and co-chair of the SMU-Cambridge Roundtable on Corporate Insolvency Law. Before joining SMU, he was a Fellow of the Program on Corporate Governance and a Fellow of the Program on International Financial Systems at Harvard Law School. He has taught, studied or conducted research at several institutions in the United States, the United Kingdom, Continental Europe, Asia, and Latin America, including the University of Oxford, Harvard Law School, Columbia Law School, Yale Law School and Stanford University. In 2022, he was also a Visiting Scholar at the Becker-Friedman Institute for Economics at the University of Chicago. Aurelio is founder and director of the Ibero-American Institute for Law and Finance, as well as a member of the Academic Steering Committee of INSOL International, and academic member of the European Corporate Governance Institute, and member of the American Law and Economics Association, the International Insolvency Institute’s NextGen Group and the American Bankruptcy Institute. Aurelio has received several scholarships and awards, including the Talentia Fellowship to pursue his studies in law and finance at the University of Oxford, the Class Prize for Best Paper in Law and Economics at Stanford Law School, the Dean’s Teaching Excellence Award at Singapore Management University, the Silver Medal in International Insolvency Studies given by the International Insolvency Institute and the American Bankruptcy Institute’s 40 under 40 Award. In 2016, he also received the Rising Star of Corporate Governance Award by the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. His academic work has been cited by courts and regulators from several jurisdictions, and it has been published in leading academic journals such as the European Business Organization Law Review, Journal of Corporate Law Studies, Australian Journal of Corporate Law, Oxford Journal of Financial Regulation, Chicago-Kent Law Review, Journal of Portfolio Management, University of Miami Comparative and International Law Review, Vanderbilt Journal of Transnational Law, Oxford Journal of International Economic Law, and International Insolvency Review. He has been invited to present his research before various regulators, governmental agencies and international organizations, including the Monetary Authority of Singapore, the International Organization of Securities Commissions, the Organization for Economic Cooperation and Development, the International Monetary Fund, the World Bank, the Australian Department of the Treasury, and the U.S. Securities and Exchange Commission. His research interest lies in the intersection of law and finance, with particular emphasis on corporate governance, financial regulation, corporate finance and corporate insolvency law, and how legal and institutional reforms may promote entrepreneurship, innovation, access to finance and economic growth.