"What happens when a firm cannot pay, and who decides?"
Every legal system has had to design a process for what happens when a firm cannot pay its debts. The fundamental tension is the same everywhere: creditors are owed money individually, but their collective interest is often best served by some process that pauses individual collection and preserves enterprise value. A liquidation that yields 10 cents on the dollar is worse for everyone than a reorganization that yields 60 cents. So you need a legal mechanism to coordinate the creditors and prevent the value-destroying race-to-the-courthouse.
The hard questions are: who runs the firm during the process (the existing management? a court-appointed administrator? the creditors themselves?), which creditors get paid in what order (strict priority? room for deviations?), and can secured creditors be forced to wait for the reorganization to play out? Different legal traditions have answered these questions very differently — and the answers shape the entire credit market.
The single biggest divide. Debtor-in-possession (the US Chapter 11 model) lets existing management continue running the firm during reorganization, with court supervision and creditor oversight. Administrator-led models (UK administration, French sauvegarde, German Insolvenzordnung) replace management with a court-appointed or creditor-appointed insolvency professional. Each has tradeoffs: DIP preserves management's specific knowledge of the business but creates moral-hazard concerns; administrator-led adds professional restructuring expertise but loses inside knowledge and creates discontinuity.
The US system is famously reorganization-friendly — Chapter 11 is structured to favor saving the going concern when possible. The German Insolvenzordnung was reformed in 2012 (the ESUG reforms) to be more reorganization-friendly, with the "shelter procedure" (Schutzschirmverfahren) explicitly modeled on Chapter 11. UK administration tries to reorganize but can quickly pivot to a "pre-pack" sale. French sauvegarde (2005, expanded 2014) provides early-intervention restructuring before formal insolvency. The trend across all four jurisdictions has been toward reorganization-friendly rules.
Under absolute priority, higher-ranking creditors must be paid in full before junior creditors get anything — the priority waterfall is rigid. The US technically requires absolute priority but allows extensive deviations through plan negotiations. European frameworks (especially post-2019 EU Restructuring Directive) move toward relative priority with more room for negotiated outcomes. The choice affects what kind of credit gets extended in the first place: rigid priority encourages secured lending; flexible priority encourages broader credit availability but at higher cost.
The US Bankruptcy Code Chapter 11 is the global template for debtor-friendly reorganization. Existing management remains in place ("debtor-in-possession"). Creditors are divided into classes and vote on a reorganization plan. The judge can confirm a plan over the objection of a dissenting class through "cramdown" if the plan is fair and equitable. The system creates a deep market for distressed debt trading, specialized restructuring law firms, and the option for firms to file pre-arranged "prepackaged" Chapter 11s. The 2008-09 GM and Chrysler bankruptcies, the post-pandemic retail wave, and the recent crypto bankruptcies (FTX, Celsius) are all Chapter 11.
UK insolvency law is dominated by administration: a licensed insolvency practitioner takes over the firm with the goal of (1) rescuing the company as a going concern, (2) achieving a better outcome for creditors than liquidation, or (3) realizing assets for the benefit of secured creditors. The pre-pack administration — where a sale is negotiated before formal administration and executed immediately upon filing — is a distinctive UK feature. The Companies Act 2006 also provides Scheme of Arrangement and the 2020-introduced Restructuring Plan, which together give the UK three distinct restructuring tools.
French insolvency law offers a layered set of procedures. Procédure de sauvegarde (2005, expanded 2014) is available before insolvency — the firm initiates it while still able to pay debts as they come due. Redressement judiciaire kicks in once the firm has stopped paying (cessation des paiements). Liquidation judiciaire handles cases where reorganization is impossible. In all three, the court appoints an administrator who works alongside management — closer to creditor-and-court-led than to US debtor-in-possession. The 2021 ordinance implemented the EU Restructuring Directive and created the "classes of affected parties" mechanism modeled on Chapter 11.
The German Insolvenzordnung (1999, reformed 2012 and 2021) replaced an older, more rigid framework. The 2012 ESUG reforms introduced the Schutzschirmverfahren ("shelter procedure"), explicitly modeled on Chapter 11, allowing management to remain in place for up to three months while developing a reorganization plan. The German system traditionally emphasized creditor protection and strict priority, but recent reforms have moved toward debtor-friendlier rescue tools. The 2021 StaRUG implements the EU Restructuring Directive, providing a preventive restructuring framework available before formal insolvency.
The convergence story is real but partial. The 2019 EU Restructuring Directive pushed all EU member states toward more US-style reorganization-friendly rules, including preventive restructuring frameworks, classes-and-cross-class-cramdown, and protection from individual creditor actions during negotiations. Germany (StaRUG), France (2021 ordinance), and the Netherlands (WHOA) have implemented these reforms. The UK's 2020 Restructuring Plan goes in the same direction.
What hasn't converged: who runs the firm during the process. The US sticks with debtor-in-possession; Europe sticks (mostly) with administrator-led. This is not a technical difference — it reflects different theories about whether managers are best positioned to fix the company they helped get into trouble. The recent crypto bankruptcies are useful illustrations: FTX's Chapter 11 (under new CEO John Ray) shows what DIP looks like when management is replaced; European insolvencies show what administrator-led looks like.
Lessons: Bankruptcy & Restructuring covers the financial mechanics — recovery rates, priority waterfalls, fulcrum securities, going-concern vs liquidation value.
Directory: Lehman Brothers remains the largest US bankruptcy filing and the canonical case study; its Chapter 11 examiner report is a primary teaching document.