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The international spread of coronavirus (COVID-19) is not only generating dramatic consequences from a social perspective but it is also heavily affecting the global economy. For this reason, governments, financial regulators and international organisations are responding to this pandemic with a package of legal, economic and financial reforms. Among the legal measures included in these packages of reforms, many countries, including Australia, Germany, India, Singapore, the United Kingdom and the United States have proposed or implemented several changes to their insolvency frameworks. Written by Aurelio Gurrea-Martínez, Assistant Professor of Law at Singapore Management University.
In a recent paper, entitled ‘Insolvency Law in Times of COVID-19’, I discuss whether using the insolvency system should be the optimal solution to deal with companies affected by coronavirus (COVID-19). I then analyse a series of insolvency reforms taking place around the world as a response to the global pandemic. Finally, the paper discusses a variety of insolvency-related reforms that have been suggested, or could be implemented, to minimise the harmful economic effects with coronavirus (COVID-19).
These reforms implemented in times of coronavirus (COVID-19) should be subject to two limitations. First, only companies whose financial situation has been deteriorated as a result of coronavirus (COVID-19) should be able to use these exceptional remedies. Otherwise, these reforms might be opportunistically used by companies that do not deserve the extraordinary departure from the general law provided by these measures. Nonetheless, due to the difficulties associated with identifying which companies have been affected by the pandemic, I argue that, as a default rule, all companies should enjoy the benefits of the reform. However, if it is shown that the company was already insolvent before coronavirus (COVID-19), or a company does not need the insolvency or insolvency-related measures implemented in the package of reforms, these debtors should be prevented from using these exceptional remedies. In fact, any opportunistic attempt to use exceptional measures should be punished. Second, these measures should also be subject to temporal limitations (eg six months) that can then be revised based on the evolution of coronavirus (COVID-19) in a particular country.
The paper concludes by emphasising that, while the aforementioned reforms can provide companies and corporate directors with a valuable breathing space, they do not solve the fundamental economic problems faced by companies affected by the coronavirus (COVID-19): the existence of losses (due to fixed costs and lack of revenues) and lack of cash-flows. Therefore, in order to effectively respond to this global pandemic, regulators should implement these insolvency and insolvency-related reforms in conjunction with a more comprehensive package of legal, financial and economic measures.
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