When Crisis Crosses Borders

As business activity has globalized, troubled companies are more likely to involve assets, operations and financial complications for creditors and other stakeholders that are international in scope. It’s not surprising, therefore, that there is increasing interest in developing global strategies for resolving cross-border corporate crises. But evolving a global approach to corporate distress is a difficult challenge, in part because the bankruptcy codes vary internationally, reflecting fundamental differences in approaches to bankruptcy and attitudes about financial recovery. To those who are not attorneys, accountants or turnaround managers, these differences may not be readily apparent because bankruptcy codes tend to share the same basic priority: to protect creditors’ interests and find ways to keep them “whole.” Jurisdictions tend to differ, however, in their assumptions about the best ways to achieve these goals within acceptable parameters of risk.

The U.S. system, for example, has long been predicated on the notion that rehabilitation, when possible, offers the best prospects for companies that are in distress, unable to pay their debts and forced to seek refuge in bankruptcy protection. There’s a commitment in the United States to explore options for a second chance, in the expectation that creditors’ and other parties’ financial interests will, in the long run, be best protected if a company can be restructured to restore and rebuild its enterprise value and, in so doing, preserve jobs.

Alternatively, the European approach has historically not been oriented toward saving either corporations or jobs, because Europeans have traditionally feared that the U.S. approach went so far in the direction of trying to save companies as to be “anticreditor” in its impact. Europeans, for example, have so far rejected one of the great strengths of the U.S. bankruptcy code: the notion that a bankrupt company can explore various restructuring options while continuing to operate as an ongoing concern. U.S. companies may even raise capital while under bankruptcy protection in order to strengthen their ongoing operations and restructuring prospects. This valuable technique, known as debtor in possession (DIP) financing, has no counterpart in Europe yet. There it’s extremely difficult for companies to pursue or raise working capital successfully after they enter bankruptcy because they cease to operate as independent entities and are typically prepared for sale or liquidation by a court-appointed administrator, making it difficult to demonstrate a need for ongoing capital.