Voting Rules in Bankruptcy Law

Abstract

We empirically evaluate creditors’ voting conditions and the bankruptcy voting rules of 90 countries. The severity of a voting rule is determined by the threshold values of the majority-voting rules by which creditors impose their interests. The higher the threshold values, the higher is the severity degree of the rule. We find that the bankruptcy laws of countries with German and French legal origin tend to have the least severe voting rules. The Nordic countries have moderate rules. The laws of the common law countries have the most severe rules. These results hold for secured and unsecured claimants. The court’s legal right of overcoming the voting result is granted more often by bankruptcy laws of French and German legal origin. The severity of the voting rules can influence the recovery of creditors’ debt. We show that a coalition of creditors that has a common interest can use the severity of the voting rule to influence the approval of a reorganization plan that provides a higher recovery rate of the creditors’ debt.

Bankruptcy voting process and corporate reorganization

“…From the bankruptcy perspective, creditors compose the pool of voters that must decide the acceptance of business restructuring plan. In general, unsecured creditors have full voting rights, while some bankruptcy laws can exclude secured creditors from voting (Stef, 2017). Granting voting right to secured creditors enlarges the pool of voters.…”

“…Nevertheless, their empirical approach neglected the bankruptcy voting process that can shift the control over firm's resources from debtors toward creditors (Gilson, 1990). As argued by Stef (2017), such approval process resides on three legal dimensions, namely, voting right of secured creditors (1), voting rule (2), and court's power to confirm the reorganization plan (3). Furthermore, we shall discuss our hypotheses dealing with those dimensions.…”

“…The way firm's continuation is decided in court may represent an important mechanism to solve the conflict between secured and unsecured claimants. Our research question is worthy of attention, as the reorganization procedure is poorly used despite a significant spread across national legislations during the 2000s (Stef, 2017). According to Brouwer (2006), the percentage of confirmed reorganization cases was close to 2.5% of the total bankruptcy cases in France (Kaiser, 1996), 0.39% in Germany (Kaiser, 1996), 2% in the Netherlands (Boot & Ligterink, 2000), and 5% in the United States (Gilson, 2001).…”

“…In this puzzle, a reorganization procedure is based on a plan that must be accepted by creditors and/or approved by the court. According to Stef (2017), reorganization approval process is defined by a legal framework with three major components, namely, the voting right of secured creditors (1), bankruptcy voting rule (2), and court's legal right to overrule creditors' decision (3). This study aims to investigate if the legal design of bankruptcy voting process can impact the use of corporate reorganization at national level.…”

“…In this sense, we expand previous studies that addressed the impact of legal variables, such as creditors' protection (Claessens & Klapper, 2005) and firing restrictions (Stef, 2018), on the global use of bankruptcies. Third, our paper aims to shed new light on the financial consequences of bankruptcy voting process that can be relevant for creditors' recovery rate (Stef, 2017) and foreign bank's presence (Stef & Dimelis, 2020).…”