Can the Sauvegarde Reform Save French Bankruptcy Law?: A Comparative Look at Chapter 11 and French Bankruptcy Law from an Agency Cost Perspective

Abstract

This paper aims to cast Chapter 11 as concerned primarily with the agency problems and conflicts that inhere in the bankruptcy context. Chief among these problems is management's increased appetite for risk and the urge for management to wait out financial difficulties to the detriment of the firm as a whole. Chapter 11 mitigates these agency conflicts and their concomitant costs by ceding control - and in some cases cash or securities - to managers who timely file for bankruptcy protection. Since the agency problem is impossible to avoid altogether, Chapter 11 is likely to remain useful in this context, despite its drawbacks (e.g., increased cost of capital due to the impairment of the contractual rights of lenders and debtholders). French bankruptcy law is undergoing a dramatic development at the moment, and is moving towards a Chapter 11 framework where managers have an integral role in the reorganization process. The paper argues the former French bankruptcy regime was ineffectual largely as a result of its embedded misconception of the fundamental agency conflicts that insolvent firms undergo. The new sauvegarde procedure is considered and described as a welcome step for French bankrupts, workers, and most commercial parties.

Keywords: sauvegarde, chapter 11, agency costs, agency, law and finance, bankruptcy, absolute priority rule