A resource-based analysis of bankruptcy law, SMEs and corporate recovery

Abstract

The UK Company Voluntary Arrangement (CVA) is an early example of a bankruptcy regime designed to aid the rescue of financially distressed SMEs. Its efficacy hinges on its application to aid only viable companies with liquidation as the preferred option for companies that are not viable. This article proposes the resource-based view as a theoretical means to assess the viability of bankrupt SMEs. Seven hypotheses are tested and provide support for the central proposition, that a company which has resource strength, but is pushed into bankruptcy by temporary factors, is more likely to succeed in a CVA. The article concludes that the resource-based view is useful for analysing the viability of bankrupt companies and that well-designed bankruptcy law can promote SMEs and entrepreneurship.

The determinants of the costs of financial distress in SMEs

“…A drawback of this trend is that the insolvency process is allowed to take a longer time until a definitive resolution is achieved, which can result in a higher loss of value in the case of a final liquidation. In contrast, pro-creditor insolvency laws, such as in the United Kingdom, often include the right for secured creditors to ask firms to be declared insolvent (Cook et al, 2012) and to restructure or liquidate swiftly.…”

“…It is important to note that during the observation period, more new debtor-friendly frameworks have been proposed to deal with insolvency in order to promote entrepreneurship, as Cook et al (2012) document for the UK case. In order to quantify the characteristics of insolvency laws across countries a value of 1 is given when the characteristics in a particular country are pro-debtor and 0 otherwise.…”

Success and failure in turnaround attempts. An analysis of SMEs within the Finnish Restructuring of Enterprises Act

“…From a social welfare perspective, the former should be allowed to become bankrupt and their resources reallocated. For the latter that are potentially viable, it is argued that successful turnaround will lead to a superior social welfare outcome than bankruptcy (Cook, Pandit, and Milman 2012). Given the economic importance of small-and medium-sized enterprises (SMEs) (MadridGuijarro, Garcia-Perez-de-Lema, and van Auken 2011), governments in many countries have therefore attempted to aid financially distressed SMEs by reforming their bankruptcy regimes so that they promote recovery from temporary financial difficulty.…”

“…The most notable reform is Germany's which amended its insolvency law to facilitate in-court restructuring of distressed companies providing new opportunities for debtors. Despite this consensus on the problem and on policy response, very little research exists on the nature and outcome of SMEs within these regimes (Cook, Pandit, and Milman 2012).…”

From failure to corporate bankruptcy: a review

“…When enacted, such a system is able to strenghten economic growth resulting from entrepreneurship. However, as deplored by Cook et al (2012), 'the literature provides little practical guidance on how such a choice should be made' (p. 276). That is why, in a quite recent overview of bankruptcy law design, Lee et al (2007) concluded that the topic is still 'an important but understudied area' (p. 268).…”