Économie et Statistique n° 443 - 2011 Household overindebtedness commissions - French school drop-outs today: characteristics, life histories, and outcomes - Ailing businesses: how the courts strike a balance between preserving jobs and settling liabilities
Ailing businesses: how the courts strike a balance between preserving jobs and settling liabilities
When an ailing business goes bankrupt, the commercial court must strike a balance between keeping the firm in operation and settling its liabilities. This trade-off is written into the Act on court proceedings for dealing with insolvent enterprises. Few studies to date have compared court practices with the broad goals defined by lawmakers. We can analyze the issue by asking a series of three questions: (1) What factors shape the decision to keep a firm in operation by placing it in receivership? Is this outcome determined by the court's handling of the proceedings? (2) Does the settlement of liabilities depend on the court's actions during the proceedings? (3) How does the court strike a balance between preserving jobs and settling liabilities when several bidders are competing to acquire the firm? Our study, based on data collected in commercial courts (Paris and Paris Region), provides some answers. We used the data to create a sample of ailing firms for the period 1989-2005: some remained active after being put in receivership (involving plans to continue operations or be sold off); others had to sell their assets under a court-ordered liquidation. The data suggest that the actions of the courts during collective insolvency proceedings increase the chances of a firm's recovery. However, we do not find a significant link between the courts' actions and the settlement of liabilities. Lastly, the data confirm the assumption that judges are responsive to the job-preservation argument when examining acquisition bids. Yet our study invalidates the notion that the choices made by the courts are detrimental to the satisfaction of creditors' claims.