The uneasy case for rehabilitating small firms under the 1997-reorganization law in Belgium: evidence from reorganization plans
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Using a sample of small Belgian firms that reorganized under the 1997 Law on Judicial Composition, I empirically review the law’s effectiveness to rehabilitate distressed debtors. The econometric findings show that firms with less pre-bankruptcy operational losses and a better cash position are more likely to successfully execute their reorganization plan and that certain debt restructuring measures can contribute to firm rescue. Despite these positive findings, many firms still failed to reorganise under the 1997-reorganization law, which resulted in constant criticism on its effectiveness leading up to its recent replacement in 2009. My data also shows that within the former reorganization procedure the Belgian debtor was faced with high debt instalment payments compared to international practice and that successful plan execution relied too much on the uncertain realization of the operational cash flow projections. In discussing the legal framework of the new Law on Corporate Continuity enacted in 2009—replacing the 1997-law—I argue that this new law is a more effective legislation to save distressed businesses.
KeywordsCourt-supervised reorganization Bankruptcy Insolvency regulation Reorganization plan
JEL ClassificationK20 K22 G33
This research is a reworked and updated version of the first chapter of my doctoral dissertation on creditor behaviour in distressed companies. This first chapter was originally entitled “the reorganization practice of small firms under Belgian court-supervised reorganization”. I appreciate helpful comments and suggestions from Peter Coussement, Abe de Jong, Sophie Manigart, Koen Schoors, Armin Schwienbacher, Michel Tison and Cynthia Van Hulle. I also wish to thank Anne Meeussen for the language revisions. The financial support of the Fund for Scientific Research Flanders is gratefully acknowledged.
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