Creditors, Plan Confirmations, and Bankruptcy Reorganizations: Lessons from Slovenia

Abstract

Creditors often critically shape the fate of bankruptcy reorganizations, yet the drivers and implications of creditors’ reorganization plan confirmations are still not completely understood. Exploring micro-level data on bankruptcy reorganization proceedings in Slovenia, we find that creditors, above all, demand a credible change in the exercise of control rights. The prospects of plan confirmation are positively associated with debt-to-equity conversion as well as those majority ownership changes that occur during the proceeding and feature a domestic incoming owner. In contrast, we find no evidence that plan confirmation is related to management turnover, majority ownership transfers involving a foreign incoming owner, pre-bankruptcy financial indicators other than leverage, the number of creditors, the value of different types of claims, and even the contractual details for the repayment of claims. The incidence of creditor-induced socially costly filtering failures is quite high, with estimates ranging between 41 and 78% based on the ex-post approach and between 40 and 61% based on the ex-ante approach. Confirmations of plans from non-viable businesses are more prevalent than rejections of plans from viable businesses. Our results provide a novel perspective on the creditors’ role in the resolution of business bankruptcy.

Enhancing creditor decision-making in South African business rescue proceedings: a comprehensive analysis of information requirements in business rescue plans

“…Transparency is fundamental to the institution of business rescue provisions (Conradie and Lamprecht, 2021b). It is axiomatic that the creditors must be satisfied that there is sufficient disclosure of information in the BR plan to be approved (Cepec and Grajzl, 2021). Recognising the long duration of rescue proceedings, sufficient disclosure of information is crucial in BR plans, not only to entice the vote of creditors but also to ensure accountability by the BRP (Lusinga and Fairhurst, 2020).…”

Duty calls: prediction of failure in reorganization processes

“…The range of papers on bankruptcy shine a light on the widespread interest in predicting firm failure and the availability of effective analytical and predictive techniques with which to study it. However, the features of this phenomenon vary according to the perspective from which it is approached, and forecasting the success of reorganization procedures is one that requires further investigation (Camacho-Miñano et al ., 2013; Cepec and Grajzl, 2021). This need has been reinforced by the various economic crises of recent decades.…”

“…Chapter 11 of the U.S. Bankruptcy Code is the framework from which corporate reorganization legislation has spread. Although the processes of admission, negotiation and resolution of agreements delimited in this chapter have been studied and emulated in the systems of other countries (Alanis and Quijano, 2019; Cepec and Grajzl, 2021), some studies indicate that successful reorganization processes are infrequent, despite being considered the preferred instrument for rescuing businesses (Laitinen, 2011; Wang, 2012). These considerations, therefore, indicate that insolvency can be explored using different contexts and specific legal procedures.…”

Prediction of failure in reorganization agreements under Colombia's Corporate Insolvency Act

“…As already stated, the quest for optimal insolvency regimes has not missed the emerging or transition economies (Gurrea-Mart ınez, 2020; Cepec and Grajzl, 2021b). In the particular case of Colombia, the growing number of companies that have filed for insolvency under Act 1116 of 2006 is warrant enough for us to examine the outcome of its first decade of enactment and analyze the financial factors underlying the success or failure of the reorganization agreements signed under its auspices.…”

“…The literature on predicting the failure or success of reorganization agreements is scarce, and little is known about the determinants behind corporate reorganization under different legal regimes. A series of papers on firm survival in Slovenia after bankruptcy and reorganizational success analyze the influence of ownership structure, property changes and management turnover on creditors' acceptance of a business reorganization plan (Cepec and Grajzl, 2020, 2021a, b) in a post-socialist economy that successfully coped with the transition to capitalism.…”