Insolvency proceedings from a sustainability perspective

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Cited in

DOI	http://doi.org/10.1002/iir.1345
Date	01 June 2019
Author	Tuula Linna
Published date	01 June 2019

RESEARCH ARTICLE

Insolvency proceedings from a sustainability

perspective

Tuula Linna

Faculty of Law,University of Helsinki,

Helsinki, Finland

Correspondence

Tuula Linna, Professor, Universityof

Helsinki, Helsinki, Finland.

Email: tuula.linna@helsinki.fi

Abstract

Sustainability is a wide concept in cluding environmental,

economic, social/culture, and political dimensions. Cur-

rently, sustainability research is a rich scientific discipline

producing a significant number of research papers. How-

ever, sustainability in the context of insolvency proceed-

ings has attracted little research compared with, for

example, how much attention corporate social responsibil-

ity has received in company law research. This article

studies sustainability in the context of liquidation and res-

tructuring proceedings and the preservation of different

kinds of resources (natural, manufactured, human, and

social capital) in insolvency procedures. The purpose of

insolvency proceedings may prevent the full implementa-

tion of sustainability. In bankruptcy, the administrator

must maximise the selling price for creditor satisfaction,

and there are few possibilities to promote sustainability.

When facing an acute environmental hazard, in the name

of public interest, a bankruptcy estate with assets usually

has to act unless the law stipulates that society is responsi-

ble for taking care of the problem. In restructuring pro-

ceedings, the main purpose is to continue the debtor's

business. It depends on the markets how sustainable the

debtor company must be to achieve profitability. If becom-

ing a profitable company in a “green”or otherwise sus-

tainable market requires costly efforts, creditors' interests

may require the sale of the assets. The author views

through sustainability lenses EU Restructuring and

Received: 9 August 2018 Revised: 10 February 2019 Accepted: 8 July 2019

DOI: 10.1002/iir.1345

210 Int Insolv Rev. 2019;28:210–232.wileyonlinelibrary.com/journal/iir

insolvency Directive (2019) and finds there is not much of

a sustainability approach included.

1|INTRODUCTION

We all recognise the word “sustainability,”but it is challenging to define what it means.

The word

raises even more puzzlement in the context of legal insolvency proceedings. Sustainability is often

related to “sustainable development.”Sustainable development, in turn, is a normative and holistic

conceptual framework for integrating economic development, social well-being, and environmental

protection into decision making.

The concept originates from the Brundtland Commission Report

(1987).

The Commission formulated the following, oft-quoted, definition of sustainability:

A strategy of social development that meets the needs of the present without compromis-

ing the ability of future generations to meet their own need.

In the Chairman's foreword, Gro Harlem Brundtland writes that limiting the concept of sustain-

ability to environmental issues only would have been a grave mistake. However, the environmental

aspect is an important part of sustainabil ity:

the “environment”is where we all live; and “development”is what we all do in

attempting to improve our lot within that abode.

The United Nations 2030 Agenda for Sustainable Development

affirms (at point “Planet”) that

we are determined to protect the planet from degradation, including through sustainable consumption

and production, sustainably managing its natural resources, and taking urgent action on climate

change so that it can support the needs of present and future generations. Further, at point

“Prosperity,”the Agenda announces that we are determined to ensure all human beings can enjoy

prosperous and fulfilling lives and that economic, social, and technological progress occur in har-

mony with nature.

Sustainability is not only a political agenda but also an objective for a vital field of research as

well. At the time when the Brundtland Report was published, hardly anyone could foresee that,

within three decades, those first steps on the path towards sustainability would lead to the develop-

ment of a prospering discipline of sustainability science. In 2015, the amount of sustai nability

research totalled over 135,000 papers. Of these, about 20,000 papers focused on environmental

“Perhaps no word in modern parlance means so little and much as sustainability”: Edmund C. Stazyk, Alisa Moldavanovaand

H. George Frederickson, “Sustainability, IntergenerationalSocial Equity, and the Socially Responsible Organization”(2016)

48(6) Administration & Society 655. Sustainability has become a mantra without consistent meaning, for which see Andrew

R. Keay, “Ascertaining the Corporate Objective: An Entity Maximisation and Sustainability Model”(2008) 71(5) Modern Law

Review 691.

John C. Dernbach, “Sustainable Development in Law Practice: A Lens forAddressing All Legal Problems”(2017) 95 Denver

University Law Review 123, 125.

Report of the World Commission on Environment and Development(WCED), Our Common Future (1987).

Gro Harlem Brundtland in the Chairman's foreword in the 1987 Report.

Transforming our world: the 2030 Agenda forSustainable Development, available at:

post2015/transformingourworld>.

LINNA 211

systems, 18,000 on economy and business, and over 17,000 papers on energy systems. Other

research issues in the academic landscape of sustainability research are, inter alia, transportation,

health, and fishery/forestry systems.

Apart from legal norms concerning the environment, companies, transportation, and energy, juris-

prudence in the sustainability context is still in the early stages.

For example, surprisingly little is

written about insolvency proceedings and sustainability.

This article is a “legal transplant experi-

ment”examining whether procedural law, especially insolvency proceedings, can be an objective for

a sustainability approach. The conclusion is that there are many intrinsic connections between insol-

vency proceedings and sustainability, which deserve more investigation. The approach in this article

is general without anchorage to specific national insolvency law. Instead, some references to the

Recast European Insolvency Regulation (“Recast EIR”)

and to the Directive on restructuring and

insolvency 2019/1023(“Restructuring and insolvency Directive”or “Directive”)

are included.

The writing is divided into three parts. First, before focusing on insolvency proceedings,

some clarifications regarding the concept of sustainability are presented in a judicial framework.

Second, the article examines bankruptcy (liquidation) proceedings in a sustainability context.

Third, there is a study on the relationship between sustainability and the debt restructuring of an

enterprise.

2|SOME BASIC ELEMENTS OF THE JUDICIAL

SUSTAINABILITY FRAMEWORK

2.1 |Corporate social responsibility

This article applies the four dimensions of sustainable development defined by UNESCO, which are

the environmental, economic, social, and political sections.

Culture can be included in the social

dimension. It is essential to be aware of that sustainability is a wide concept and the natural dimen-

sion is not the only one.

Over the last decades, financial, social, food, and climate crises have demonstrated that the pros-

perity and welfare of corporations cannot be dissociated from social and environmental contexts, and

many bankruptcies are rooted in flaws in ethics and governance. Therefore, increasingly, companies

See search parameters: t/environmental+management/journal/11625>.

For laws, other than environmental ones, that can be used to foster sustainability (suchas proper ty lawand comparative law)

and for the need to translate sustainability into specific legal principles, see John C. Dernbach and Joel A. Mintz,

“Environmental Laws and Sustainability:An Introduction”(2011) 3 Sustainability 531.

The same applies to procedural law concerning dispute resolution. On a more general, transnational level, see

Karin Buhmann, Power,Procedure, Participation and Legitimacy in Global Sustainability Norms: A Theory of Collaborative

Regulation (Routledge, 2017).

Regulation (EU) 2015/848 of the European Parliament and of the Council, of 20 May 2015 on insolvency proceedings

(recast).

DIRECTIVE (EU) 2019/1023 OF THE EUROPEAN PARLIAMENTAND OF THE COUNCIL of 20 June 2019 on

preventive restructuring frameworks, on dischargeof debt and disqualifications, and on measures to increase the efficiency of

procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132(Directive on

restructuring and insolvency). Official Journal of the European Union 26.6.2019, L 172/18.

See: .

212 LINNA

have decided to incorporate in their management sustainable development principles, that is Corpo-

rate Social Responsibility (“CSR”).

According to the EU Commission's definition, CSR is

the responsibility of enterprises for their impact on society.

The Commission wishes that CSR be led by companies, and public authorities should play only a

supporting role

through a smart mix of voluntary policy measures and, where necessary, complemen-

tary regulation.

Besides respect for the law, companies can become socially responsible by integrating social,

environmental, ethical, consumer, and human rights concerns into their business strategy and

operations.

CSR is closely linked to sustainability, and it includes three pillars: the environmental, eco-

nomic, and social sections. In addition, CSR uses tools that are related to the political dimension,

such as good community and governmental relations. On the other hand, regarding its pur pose,

CSR is more a limited notion than sustainability; at least in the long run, the ultimate purpose of

CSR is the profitability of the business in question.

As such, a CSR regime does not modify the

objectives of a company but rather increases the amount of limitations on how to make and dis-

tribute profit.

For sustainability, the basics include the ethical and common good between people

and nature, as well as between generations. Genuine sustainability is not a profit-making appara-

tus. This is not a criticism of CSR, but quite the opposite: without profitability, the business

would drift towards insolvency. Moreover, sustainable development policies can build a shelter

against bankruptcy, and there exists a positive relationship between CSR and the longevity of the

company.

A CSR regime is an established concept in company management, but in the context of insol-

vency proceedings, it is virtually unrecognised in theoretical terms. It is, however, acknowledged in

the practice of insolvency proceedings:

Such an approach is consistent with the idea of the institution of insolvency, which is

based on the socially responsible distribution of losses between stakeholders of a bank-

rupt company or at risk of bankruptcy.

Jean-Michel Sahut et al., “What Relation Exists Between CSR and Longevity of Firms?”(2012) 17(2) International Journal

of Business 152.

See: .

In the same way,the concept of (entity) sustainability may be limited to the financial view involving both the survival of the

company and growth. However,also in this financial view, sustaining a company can involve, “as a matter of necessity,”

concern for social and environmental sustainability: “Keeping a workforce satisfied, and refraining from abusing the

environment could set the scene for wealth maximisation.”See Keay,above note 1, 691.

Andrew Keay,“The Shifting of Directors' Duties in the Vicinity of Insolvency”(2015) 24(2) International Insolvency

Review 157. For a compact presentation of the CSR, see Stazyk et al., above note 1, 673–76.

Keay, abovenote 15, 152–168.

Kinga Bauer and Joanna Krasodomska, “The Premises for Corporate Social Responsibility in Insolvency Proceedings”

(2015) Research Papers of WroclawUniversity of Economics, nr 387, 27, available at:

publication/283006318_The_premises_for_corporate_social_responsibility_in_insolvency_proceedings>.

LINNA 213

2.2 |Justice and sustainability

Sustainability refers to a steady state of affairs where the Earth can support the human population

and economic growth without ultimately threatening the health of humans, animals, and plants.

Actually, the basic idea of sustainability is quite simple: the purpose is to preserve and protect exis-

ting natural but also manufactured resources. Accordingly, continuance is an important aspect of sus-

tainability.

The protection of resources may require that someone must make sacrifices and bear the

responsibility for sustainability. Less abstractly, for example, in bankruptcy (liquidation), with some

funds left in the estate but an acute environmental hazard threatening, conflict between satisfying the

creditors and the public interest is evident—who pays for preparing the damages: creditors or soci-

ety?

In an insolvency situation, the insufficiency of financial resources tends to intensify conf licts

of interest.

Justice is considered a good candidate for the specification of the normative dimension of sustain-

ability, as justice is well suited to address concerns of limits, scarcities, and conf licts.

However, as

far as the author knows, for example, the problem of environmental hazards in a bankruptcy estate

still exists.

In many countries, legislators have been unable to resolve the problem. Likely, in the

near future, the pressure created by strengthening the sustainability regime will prompt legislators or,

otherwise, the courts must take first steps on a case-by-case basis.

Justice includes three dimensions in the context of sustainability

1. Justice among humans of different generations (“intergenerational”justice);

2. Justice among different humans of the same generation (“intragenerational”justice); and

3. Justice between humans and nature (“physiocentric ethics”).

Legal procedures mainly link the intragenerational aspect of justice, be it a case of dispute resolu-

tion or insolvency. Procedures between humans and nature are not commonly known, and the “con-

flict”between humans and nature usually is transformed to a dispute over damages and monetary

compensation to a landowner, neighbour, or other stakeholder.

Kent Portney, Sustainability (MIT Press, 2015), 4.

Christian Becker, Sustainability Ethics and Sustainability Research(Springer, 2012), 10.

For more detail, see Paul J. Omar, “Disclaiming Onerous Property in Insolvency: A Comparative Study”(2010) 19

International Insolvency Review 41; Tuula Linna, “The Environmental Liabilities of a Bankruptcy Estate”(2017) 26

International Insolvency Review 40.

Klara Stumpf et al., “The Justice Dimension of Sustainability: A Systematic and General Conceptual Framework”(2015) 7

Sustainability 7443. For a sustainability and dispute-resolving system, see, for example, Alexander de SavorninLohman,

“Working Document on Sustainable Justice”(2011), prepared for an Expert Meeting on Sustainable Justice, Utrecht, 2

December 2011, available at: .

Besides Europe, this applies to, for example, the UnitedStates, where the bankruptcy case law on environmental claims is

highly unsettled. See Laura Coordes, “Harmonizing Insolvency and Sustainability in the Courtroom and the Boardroom”

(University of Oslo Faculty of Law Legal Studies Research Paper Series No. 2018–20), available at:

abstract=3198547>.

See Omar, above note 20, 47.

Becker, abovenote 19, 13; Stefan Baumgärtner and Martin F. Quaas, “What Is Sustainability Economics?”(2010) 69

Ecological Economics 446. See also Brian Barry, “Sustainability and Intergenerational Justice”(1997) 89 Theoria 43;

Aaron Golub, Maren Mahoney and John Harlow, “Sustainability and IntergenerationalEquity: Do Past Injustices matter?”

(2013) 2 Sustainability Science 269–277; Edmund Stazyk et al., above note 1, 655.

214 LINNA

In a sustainability framework, in addition to the traditional financial capital (money, shares,

bonds, etc.), there are four other “capitals”:

(a) natural capital;

(b) manufactured (produced) capital;

(d) social capital (e.g., administration, legislation, social trust, and networks).

The word “resources”can be used as a synonym for “capital”when talking about sustainability

and nonwastefulness.

2.3 |Systematisations

In sustainability science, concerning types of capitals, there is an established categorisation into weak

or strong sustainability.

Weak sustainability adopts the notion that natural capital is substitutable

and the essential matter is the total amount of the stock of capitals. In contrast, strong sustainability

postulates the nonsubstitutability of natural resources, which are not reproducible by human efforts,

and that nature represents a complex ecological system. In this article, the distinction between weak

and strong sustainability is used, though the terms “weak”and “strong”are a bit value loaded.

To make better use of the sustainability theory in the insolvency framework, three additional

systematisations need to be made. First, we can divide insolvency proceedings according to whether

the primary function of the proceedings is to preserve resources. If it is the principal function, the

proceedings are in this article called “sustainability-functional”proceedings. The other group is dif-

ferent kinds of procedures that preserve resources as “by-products,”with sustaining not being their

primary function. These proceedings are here called “sustainability-factual”proceedings.

Second, a separation between internal and external sustainability viewpoints of proceedings can

be made. Internal sustainability is connected to the outcome of the proceedings, that is, whether the

proceedings produce sustainability, for instance, protection of natural or human resources. In con-

trast, external sustainability refers to the proceedings themselves and asks whether the proceedings as

a procedure are managed in a sustainable way. Both of these aspects may exist in parallel. For exam-

ple, a simplified and effective debt-restructuring procedure that retains a functioning factory with

engines and patents, as well as the jobs, is the “resource-wise”procedure in double meaning: the out-

come of the proceedings is sustainable and the procedure itself operates in a sustainable way. It is

incontestably an optimal way to arrange insolvency proceedings.

Finally, there is a question regarding the relation between sustainability and the viability of a com-

pany in financial distress. For insolvency proceedings, the court or some other authority has to decide

whether the company is still viable. We can ask what role sustainability plays in this crossroads

between restructuring and liquidation. Once viability means potential for traditional productivity, the

See, for example, Neva R. Goodwin, “Five Kinds of Capital: Useful Concepts forSustainable Development”(Tufts

University Working Paper No. 03–07) (2003), availableat:

07sustainabledevelopment.PDF>.

See, for example, Eric Neumayer,Weak Versus Strong Sustainability: Exploring the Limits of Two Opposing Paradigms

(Edward Elgar Publishing, 2013); Tom Dedeurwaerdere, Sustainability Science for StrongSustainability (Edward Elgar

Publishing, 2014); Fridolin Brand, “Critical Natural Capital Revisited: Ecological Resilience and Sustainable Development”

(2009) 68 Ecological Economics 605; Stumpf et al., above note 21, 7443; Konrad Ott, “Institutionalizing Strong

Sustainability”(2014) 6 Sustainability 894.

LINNA 215

only thing needed is a prognosis about productivity based on profit and loss accounts, whereas con-

sidering other resources requires a broader perspective.

Much depends on the law: when traditional profitability is decisive, saving know-how, natural

resources or employment plays no role in estimating viability. However, these resources must also be

considered if they are, in reality, conditions for reaching traditional profitability.

For example, an

essential question may concern whether the current workforce of the company is competent and moti-

vated or whether operations can continue without materialisation of responsibility for environmental

damages. Overlooking these kinds of “costs”may prove fatal.

Next, taking the above-mentioned systematisations as a standpoint, insolvency proceedings are

viewed in a sustainability framework. As mentioned above, the approach includes liquidation pro-

ceedings (bankruptcy) and restr ucturing proceedings of enterprises, both in general meaning.

3|LIQUIDATION PROCEEDINGS (BANKRUPTCY)

3.1 |Stakeholders

In modern corporate law research, the multiplicity of stakeholders related to a company has been

highlighted. A “stakeholder”can be defined as any person whose r ights or interests are affected

directly or indirectly by insolvency or restructuring proceedings, which is why they may have to be

involved under insolvency and restructuring laws.

Under the normal operation of a company, the shareholders are a strong group of stakeholders.

However, the shareholders are not “owners”of the company, and many other stakeholders' over-

lapping property rights or property-type claims can be identif ied during normal operations. It is the

task of the legal system to adjust and reconcile different rights and interests: it specifies the condi-

tions under which the various stakeholders (inter alia, shareholders, creditors, and ta x authorities) can

draw on the resources of the company, and, at the same time, preserving the company as a source of

productive value: the corporation produces surplus for various stakeholders.

The pattern changes in bankruptcy: the purpose to produce surplus for shareholders ends in liqui-

dation proceedings. In liquidation, unlike in restructuring, the shareholders are dropped out as stake-

holders, apart from the quite unusual situation where the value of the assets in the bankruptcy estate

According to a questionnaire (INSOL International, Impact of the Financial Crisis, 2010) conducted by Reinout Vriesendorp

and Martin Gramatikov, in addition to creditors' interests,saving employment was the most compelling reason for

restructuring. The second-most influential factor was saving the tactical and strategic know-how. Almost as important was the

motivation to keep the owner or management in place, whereas satisfying politicians or public opinion was onlya minor driver

towards business rescue: Reinout D. Vriesendorp and Martin A. Gramatikov,“Impact of the Financial Crisis: A Survey”

(January 2010) (European Banking Center Discussion Paper No. 2010–12; Center Discussion Paper Series No. 2010–42),

available at: .

Bob Wessels and Stephan Madaus, Rescue of Business in Insolvency Law (2017) Instrument of the European Law Institute,

73, available at: . See, for various definitions of stakeholder presented in the literature,

Gert-Jan Boon, “Harmonising European Insolvency Law: The Emerging Role of Stakeholders”(2018) 27 International

Insolvency Review 155. See also, fora salience-based approach, Ronald K. Mitchell, Bradley R. Agle and Donna J. Wood,

“Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What ReallyCounts”(1997)

22 The Academy of Management Review 853. In a broad sense, both directly and indirectly affected stakeholders can be

included within the definition of public interest: Jassmine Girgis, “Corporate Restructuring, the Evolution of Corporate Assets

and the Public Interest”(2013) 22(1) International Insolvency Review 46.

Under this approach, a business corporation can be called “commons”: Simon Deakin, “The Corporation as Commons:

Rethinking. Property Rights, Governance and Sustainability in the Business Enterprise”(2012) 37(2) Queens Law Journal

367. See also Jonathan Rushworth and Arad Reisberg, “TransformingCapitalism from Within: A Relational Approach to

Company Management and Operations”(Part One and Part Two) (2014) 11 International Corporate Rescue 332 and 423.

216 LINNA

exceeds the amount of the debts and administration costs. At the end of the proceedings, the company

will be wound up and the value of the shares dissolved. Thus, there is not much interest left for the

shareholders. However, if the bankruptcy debtor is a natural person and the law does not provide a

discharge of debts at the end of the bankruptcy proceedings, the interests of the debtor converge with

the interests of the creditors.

Within the collective body of the creditors, the interests are mutually competitive (“insolvency

crowd”in decision making

) and considered according to the provided priority and otherwise

according to the equal ranking following the pari passu principle. This inside competition does not

prevent the mutual interest of getting the best possible selling price. Only secured creditors are

unrelated to the selling price, but this is merely when the value of the collateral completely covers the

secured claim. Thus, in corporate bankruptcy, virtually, the most evident group of stakeholders is the

unsecured creditors.

3.2 |Green/otherwise sustainable bankruptcy?

Bankruptcy as liquidation proceedings usually means the closing of the debtor's business and the sell-

ing of the assets. Such financial capital that requires no selling, including bank account funds, will be

distributed to the creditors after paying the costs of estate administration. Bankruptcy proceedings

are thus the total and final liquidation and clearing of all claims. However, sometimes it is practical

to preserve the still-existing capacity for productivity. Depending on the case, selling the assets as a

going concern may be more profitable than selling the property object by object.

In the going-concern framework, manufactured capital, such as plants, machines, and technology,

as well as human capital, such as intangible resources (patents, trademarks, business secrets, data

protection systems, know-how, and reputation), accumulated and stored in the business of the debtor,

can be retained.

From a sustainability aspect, there is an impor tant difference between selling a

debtor's property and selling a debtor's business. In the latter case, the added value gathered in the

business (compared with “pure”property) can be maintained. Sustainable selling benefits the credi-

tors, whereas the position of workers usually depends on whether the buyer is willing to hire them

(see below for the Smallsteps case).

If the production engineering is outdated and the patents and other intangible resources are worth-

less, selling the property object by object and the raw material and vehicles separately will perhaps

lead to the best outcome. In this situation, keeping the business in operation only to save jobs is not

justified. Unless otherwise provided in the law, the bankruptcy administrator is not allowed to sell

the property as a whole against the creditors' interest. However, in some cases, even an outdated

business may attract buyers, especially other operators in the same market, for removing competing

businesses from the market. Then again, selling as a going concern may be reasonable. As stated, in

liquidation proceedings, the interest of the collective body of creditors is decisive unless the law

otherwise stipulates. It is not the task of the bankruptcy administrator, for example, to ensure the

proper functioning of the markets by choosing a buyer so a competitive edge will not be formed.

From a strong sustainability perspective (i.e., a nonsubstitutability paradigm concerning natural

resources), selling as a going concern does not necessarily mean a pleasant outcome. Selling a mine

See Stephan Madaus, “On Decision-Making in Rescue Cases: Why Creditors and Shareholders Should Decide About a

Rescue Plan”in Bernard Santen and Dick van Offeren (eds), Perspectives on International Insolvency Law. A Tribute to Bob

Wessels (Kluwer Law,2014), 216, 226.

For intangible resources and sustainability, see Richard Hall, “AFramework Linking Intangible Resources and Capabilities

to Sustainable Competitive Advantage”(1993) 14 Strategic Management Journal 607.

Another thing is that the transaction may require a permission from competition authorities.

LINNA 217

that pollutes the surroundings and spoils water systems is not a triumph for nature, even if the mining

activity is legal and fulfils the requirements set out in the environmental permit. Even so, the task of

the bankruptcy administrator is not to promote strong sustainability against the interests of the credi-

tors. The administrator replaces the original management of the debtor company to organise the sell-

ing of assets in the creditors' collective interest. As said, the interests of the general body of creditors

are the strongest instruction for the administrator—within the limits of the law and permit conditions,

of course.

Not even when the bankruptcy estate continues the business of the debtor company is the adminis-

trator competent to turn the activity towards sustainability, causing extra costs if no equivalent addi-

tional selling price is to be expected. Only when the impact on the selling price is positive when

taking into account the costs incurred is “green”bankruptcy management well founded. There is

hardly any support for the administrator (unless not in the law) in terms of protection labour or nature

beyond or against the creditors' interests, as long as the business of the debtor company fulfils the

requirements of law and there is no prospective higher selling price due to added sustainability.

Undoubtedly, with the creditors' consent, the bankruptcy administrator is allowed to develop the

business towards sustainability despite additional costs. This may occur in bankruptcy estates with

only a few big creditors that favour their business cooperation with sustainable companies. For them,

refraining from a maximum dividend in bankruptcy proceedings in favour of sustainability may be in

line with their own business strategies and long-term policies.

When, prior to bankruptcy, the debtor company was functioning in a market in which sustainabil-

ity strategy is a necessity, it is usually in the interests of the creditors to continue the operation

according the same standards for selling the assets as a going concern. In that case, the operation

already accomplishes sustainability; for example, the workers are trained for that, and investments for

clean air or water have been put in practice. Nonetheless, if the reasons for financial distress are

derived from too heavy an accent on sustainability equated to the requirements of the market, causing

additional costs compared with competitors, it makes sense to ease the efforts for sustainability, but

not below the limits where the market will no longer accept the change. However, the time limit is

quite short for the bankruptcy administration to implement fundamental changes of strategy.

In sum, the primary task of the bankruptcy administrator is to maximise creditor satisfaction and

minimise all obstacles preventing this from happening. The administrator has to balance the require-

ments of the market and the interests of the creditors and search for the optimal way to proceed.

Thus, green bankruptcy is not preferred or intrinsically valued in liquidation proceedings. Only when

it is in the interest of the general body of creditors does the administrator have to consider sustainabil-

ity. Moreover, strict sustainability responsibility on the part of the administrator is not reasonable

considering the vagueness in the concept of sustainability. Only “normal”CSR can be required if the

bankruptcy estate continues the business of the debtor, pursuing sales as a going concern. The task of

the administrator is to implement CSR in the interests of creditors.

3.3 |The Smallsteps case

Bankruptcy, being a liquidation proceeding, does not aim to retain and continue the business of the

debtor beyond a sale. If the purpose is to rescue the business, then the proceeding is not a bankruptcy

proceeding in any perspective. In the Smallsteps BV case (C-126/16), the Court of Justice of the

European Union (CJEU) stated, concerning the Dutch pre-pack procedure, that it (such as that at

issue) was aimed at a swift relaunch of the undertaking's viable units to safeguard the value of the

undertaking and the employment posts. The CJEU ruled that Directive 2001/23/EC (protection of

218 LINNA

workers) is applicable in situations where the transfer of an undertaking takes place immediately after

an insolvency declaration in order to continue the business by a third party. According to the CJEU,

it was irrelevant that the pre-pack was also aimed at maximising the proceeds of the transfer for all

the creditors of the undertaking in question.

Advocate General Mengozzi noted in his opinion (29 March 2017, at point 57) that the liquidation

procedures are not created for the continuation of the undertaking to retain the value that stems from

the uninterrupted continuation of its operations but are concerned solely with maximising the pay-

ment of the creditors' collective claims.

In practice, the Dutch version of pre-pack means restarting the business with fewer employees.

Looking at the Smallsteps case through a sustainability lens, an uninterrupted continuation of

the business is a sustainability-functional procedure to save the viable part of the business. However,

according to the CJEU, the problem was a “wrong”procedure. Perhaps one message of the

judgment is that if the purpose of the proceedings is to preserve the resources in the interests of both

the creditors and stakeholders near the original debtor, the right way to proceed is through

restructuring proceedings. From this perspective, the CJEU judgment gives stronger weight to the

protection of social resources, that is the workers' positions, than to the interest of continuing the

business without a break.

This is the legal side of the consideration. From a sustainability perspective, the essential matter is

that there was no comparison to determine the most efficient way to implement worker protections.

The hypothesis of the CJEU was probably that the pre-pack arrangement meant bypassing the protec-

tion of employees. However, as far as the author noticed, the judgment does not clearly claim that

through a pre-pack arrangement, a fewer workers could keep their jobs compared with traditional

bankruptcy or debt restructuring.

Thus, in the legal interpretation, there are certain limits that pre-

vent surveying the whole depiction from the sustainability viewpoint. One reason for this is, of

course, the requirement of legal certainty, not basing the judgments on sustainability on a case-by-

case basis. Thus, the courts are generally able to promote sustainability only by applying the law. It is

the task of national or European legislators to implement sustainability aspects.

The purpose of this brief case analysis is to demonstrate difficulties in planning the optimal

preservation of different kinds of resources. From a sustainability viewpoint, concerning

manufactured capital, the situation is more or less the same whether the business is continued by the

debtor (restructuring), by a planned third party (pre-pack), or by a buyer found after opening the

bankruptcy proceedings (selling as a going concern). Regarding employees, one wonders whether

there is reason to allege that one of these three alternatives regularly protects the interests of workers

in the most efficient way. It may happen that some resources are best protected in one proceeding and

Vincent Vroom and Rolf Sperling, “Estro: The End of the (Dutch)Pre-pack”(Editorial) (2017) 14(6) International

Corporate Rescue 400. For pre-pack sales, see also Alexandra Kastrinou and Stef Vullings,“No Evil Is Without Good’:A

Comparative Analysis of Pre-pack Sales in the UK and the Netherlands”(2018)27 International Insolvency Review 320; John

Armour, “The Rise of ‘Pre-Pack’: Corporate Restructuring in the UK and Proposals for Reform”(2012) available at:

https://ssrn.com/abstract=2093134>; Roelf Jakob de Weijs,“Harmonization of European Insolvency Law: Preventing

Insolvency Law from TurningAgainst Creditors by Upholding the Debt-Equity Divide”(2017) Amsterdam Law School

Research PaperNo 2017-21, available at: ; Andrea Polo, “Secured Creditor

Control in Bankruptcy: Costs and Conflict”(2012), available at

10.2139/ssrn.2084881>.

Vroom and Sperling argue that, in practice, more employeesare retained with a pre-pack than a “standard”Dutch bankruptcy

(Vroom and Sperling, above note 33, 400). See also Sandra Frisby, “Apreliminary analysis of pre-packed administrations”

(2007) University of Nottingham, available at: ault/files/sandrafrisbyprelim.pdf>.

Arguably, a comparison to restructuring is also needed.

LINNA 219

the rest in another. Consequently, combining the best parts of those proceedings perhaps would lead

to an optimal outcome.

Nevertheless, as the Smallsteps case indicates, developing combinations of insolvency proceed-

ings is not without problems.

The protection of certain resources requires it to happen in the “right”

proceedings. Thus, the inflexibility of the categories of proceedings may prevent the most sustainable

outcome. This reflects the fact that procedural law is built on formal types of procedures. This is seen

also in the Recast EIR, where Annex A presents an exclusive list of insolvency proceedings to which

the Regulation applies.

3.4 |The bankruptcy estate and an acute environmental hazard

As stated, it is not the task of the bankruptcy administrator to promote sustainability by keeping the

business running for selling it as a going concern if this is not happening in the creditors' interest.

However, the situation is different when there is an urgent need to prevent or repair an existing, per-

haps serious environmental hazard. Natural resources may be lost or spoiled in a way that threatens

public interests and causes liability for private damages. There, the essential question is who bears

the costs (sustainability responsibility). In a bankruptcy estate with assets of value, the creditors'

interests are in distributing the assets and leaving the environmental problem to be taken care by the

society.

If the bankruptcy estate continues the debtor's business to sell it as a going concern, there are

well-founded reasons to require that the estate bear all the normal environmental responsibilities pro-

vided in the law for an operator. In that case, the bankruptcy estate is in a same situation as other

operators, and it must take care of the “new”environmental problems (originating from the estate's

operation) as well as “old”problems (originating from the debtor's previous operation). For example,

if the bankruptcy estate continues mining and selling ore, the administrator has to consider, on the

one hand, the responsibilities of an operator according to the law and required by the permit for oper-

ation, and, on the other, the expected additional selling price as a going concern.

A complicated question is who bears the sustainability responsibility concerning the “old”envi-

ronmental problems when the bankruptcy estate does not continue the business activities of the

debtor but keeps the business in stand-by mode, aiming to sell it as a nongoing concern, that is, as a

whole to be put in operation again later by the buyer. The bankruptcy estate, for example, does not

extract or sell ore, but it maintains the mine as a whole unit with facilities and vehicles ready for oper-

ation. Without provision in the law, it is not obvious whether the estate even then is responsible for

caring for environmental problems.

One possibility to answer this question is to connect the responsibility of the bankruptcy estate to

the acuteness of the environmental hazard. If the situation is serious, the bankruptcy estate must act

as everybody else in the same situation and use the assets to prevent additional damage and repair the

harm that occurred. However, from a more general standpoint of public interest, the requirement of

the acuteness of environmental hazard for th e bankruptcy estate's responsibility to act can be

impugned, especially from an intergenerational justice perspective. For example, leaving long-lasting

waste to be taken care of by the next generations may face difficult ethical problems. Additionally,

the question of the need for creditor protection arises, that is, whether the creditors were able to pro-

tect in advance their interests, inter alia, by securities. Without entitlement in the law, the estate has

no right to expect that society (taxpayers) should act instead of the estate. Another matter is whether

For preinsolvency schemes in the categorisation of insolvency and restructuring proceedings, see Stephan Madaus, “Leaving

the Shadows of US Bankruptcy Law: A Proposal to Dividethe Realms of Insolvency and Restructuring Law”(2018) European

Business Organization Law Review1.

220 LINNA

the estate can get back the loss from the management of the debtor company or whether it is the task

of the creditors to ensure beforehand with whom they make business.

Of course, a bankruptcy estate without any assets is not able to act, and no liability can be laid on

a bankruptcy administrator or the creditors even if the environmental situation is serious. Then, in the

name of public interest, society has to act. The other matter is whether someone is responsible for

repayment to society due to negligence or crime.

Again, this is the legal side of the matter. From a sustainability perspective, it is not important

who bears responsibility for the costs of preventing or repairing an acute environmental hazard or

damage. Society may be willing to take on the responsibility, and so safeguard funding for an impor-

tant industry, such as mining and energy production. Ultimately, the matter is a political one. The

legislator has to balance the public interest for sustainability and the possibilities for industry to get

financing at a reasonable rate. Nature does not know who caused and who cured the damage; an

ethical demand is that “somebody”bears the responsibility. Moreover, there are many possibilities to

decentralise the responsibility with different kinds of secondary funds and insurance systems.

The situation is equivalent to when the environmental problem is not acute as such but causes so

extensive cleaning costs (e.g., tons of scrap metal on the area) that the property is deemed worthless

or having negative value, meaning no one would be willing to take the property, even free. If there

are assets with value in the insolvency estate, the tricky question is whether the estate is allowed to

cut off the contaminated part of the property and keep the rest or whether the estate is obliged to use

the assets for reparation or cleaning the spoiled part of the property.

Externalising the spoiled part of the property means factually abandoning that property. For exam-

ple, leaving the polluted land behind in the possession of the original company means factually

abandoning, as the original company is winding up (dissolved) at the end of the proceeding and

removed from the company register. Usually, a company is then without management and legal

capacity. The abandoning of the polluted part of the assets is acceptable only if provided in the law,

whereas as a one-sided action from a bankr uptcy estate, that is, without “permission,”abandonment

is hardly acceptable. That was the outcome also of the Supreme Court of Canada Judgment rendered

in the case of Orphan Well Association v. Grant Thornton Ltd. (31 January 2019). The bankruptcy

trustee wanted to sell the oil wells that still were producing and profitable and walk away from the

spent and non-producing wells burdened with liabilities that exceeded their value. The Supreme

Court ruled that a bankruptcy is not a license to ignore rules, and insolvency professionals are bound

by and must comply with valid laws during bankruptcy. They must comply with nonmonetary obliga-

tions that are binding on the bankrupt estate that cannot be reduced to provable claims.

Leaving the liability for the spoiled property to shareholders is excluded unless there is some other

ground for liability than owning shares of the company. This is a fundamental principle concerning

limited liability companies. Otherwise, for example, owning mine shares would be highly risky

regarding personal liability.

3.5 |The bankruptcy estate and compensation of damages

If private persons or entities have suffered damages and the polluter is in bankruptcy, in practice, only

monetary compensation is left. The EU principle that “th e polluter pays”is in force but has changed

to a right to lodge a claim on damages. Without a priority provided in the law, there is not much

chance to get compensation in bankruptcy proceedings.

Moreover, monetary compensation is a legal concept based on the notion that environmental dam-

ages are substitutable with money. However, from the standpoint of strong sustainability, money can-

not compensate for environmental damage. From a legal viewpoint, monetary compensation is

LINNA 221

deemed a fair and just satisfaction: the one who has suffered damages gets money in exchange for

natural capital. In a bankruptcy case, usually, full legal compensation is not available. Thus, the prin-

ciple that “the polluter pays”is not fulfilled, but more cannot be done. Though in extreme situations,

where land or water has become useless for the owner, according to the law, the polluter may be obli-

gated to redeem (a kind of expropriation) the polluted area. From a sustainability perspective, this

alternative, that is a change in owner, does not remedy anything. In addition, the bankruptcy adminis-

trator is hardly allowed to redeem if it favours one of the creditors.

In sum, when the polluter is bankrupt, the compensation takes place both in a wrong “currency”

(for real, money does not compensate for environmental damage) and is usually in sufficient (lack of

assets in the estate), even in that currency. For example, if the mine has polluted the surroundings

and caused long-lasting environmental problems, the private landowners, fisheries, and other stake-

holders who are prevented from exercising their right to utilise natural resources can lodge their

claims in bankruptcy proceedings. When the polluter is bankrupt, the situation is poor in two ways:

the damage itself is irreplaceable and not even the “wrong”kind of compensation will be paid in full.

Nevertheless, there is nothing to be done to cure this problem save for altering the priority system to

favour claims on environmental damages. That in turn raises the question of why environmental

damages should enjoy “super”priority. There, again, we are facing political values.

4|RESTRUCTURING PROCEEDINGS

4.1 |Sustainability and the purpose of restructuring

As noted above, in bankruptcy, the purpose of producing surplus for the current stakeholders termi-

nates, and the selling price is used for creditor satisfaction. In restructuring proceedings, the purpose

is the opposite: the aim is to restore the state of affairs where various stakeholders can draw the

resources of the company. That takes place by reorganising the company's operation to become again

a source of productivity. After successful restructuring, the stakeholders, among them being the cred-

itors, can make use of the surplus of the company.

4.1.1 |Market ecology, sustainability, and restructuring

Restructuring a company that is in financial distress but still viable is a benefit to all stakeholders that

have an interest in that specific company. In restructuring, it is essential that the value of the company

benefits its “own”stakeholders.

The picture is different when looked at from “a market ecology”perspective: the value collected

in the company may be preserved beyond the expiration of the company—a company is only a shell

of the activity and values—elsewhere in the market. For example, valuable knowledge usually does

not disappear but will influence somewhere else in the market after the unsuccessful company has

terminated. From that viewpoint, the current restructuring prominen ce can be questioned.

In a sustainability framework, arguably, this approach is well founded: nature does not know or

care who “owns”the land in legal terms. The same applies to other kinds of capitals: as long as

resources are not lost, it does not matter who possesses the resources. Compared with the above-

mentioned approach: “the market will sustain values that preserves to be sustained,”sustainability is,

however, a broader concept.

As evidenced by Tim Verdoes and Anthon Verweij,“The (Implicit) Dogmas of Business Rescue Culture”(2018) 27

International Insolvency Review 398.

222 LINNA

From a pure sustainability perspective, losses of all kinds of resources should be avoided. None-

theless, trying to retain outdated immaterial property is not realistic, even if the resources offered for

developing the technical innovation in question are lost. On the other hand, the patent has served the

economy, and, at some point, the work is done and a new technology replaces the old one. The other

thing is if, inter alia, usable raw material that is wasted due to terminating the production or refining.

The fact is that not all resources can be relocated to other functions in the market. The difference

compared with market ecology is that sustainability is troubled, even following losses of such

resources that have no value in the market.

Further, the analysis gets another angle when we consider creditors' interests. The loss and transfer

of resources out of an insolvency estate elsewhere in the market is the normal way in which western

markets function. From the creditors' perspective, the loss of resources without proper redress is

against their interests. It is of little consolation for creditors with unpaid claims to know that the

resources are recycling somewhere in the market in a sustainable way. There are no good reasons to

bypass the creditors' interests, even if all value and resources would be sustained. In sum, sustainabil-

ity is in the interests of the creditors only if they get compensation for the resources.

4.1.2 |Cutting off faded branches

The difficult question is which way, liquidation or restructuring, provides better compensation. As

said, the purpose of restructuring is the continuation of the debtor's business. However, the implemen-

tation of the restructuring plan may include selling some of the debtor's assets.

For this purpose, the

assets intended for sale perhaps are kept as a going concern for a better selling price, and the rest of

the business will be reorganised. Here, again, there is a difference between selling the property and

selling the business of a debtor. When the part of the assets intended for sale form a functional unit,

which is kept in operation, a part of the debtor's business will be sold, not just a part of the property.

From a sustainability aspect, the business-based added value in the property will be retained.

The core notion of restructuring is the continuation of the main part of a debtor's business and

preserving—to the point of restructuring it requires—the value included and gathered in the com-

pany. Thus, the purpose is not the preservation of resources as such but the retaining of the parts of

the business where the potential for profitability is included. The debtor company may have to give

up, for example, some costly investments to implement the restructuring plan, even if it will mean a

loss of resources: in restructuring, there is no reason to maintain an unprofitable part of the business,

even if the invested resources will be lost and wasted. In this way, sustainability is only a subordinate

outcome, whereas the purpose of restructuring, that is, to restore the profitability of the debtor's busi-

ness, is the primary drive. Accordingly, restructuring is a sustainability-functional proceeding, but

only to the point where it promotes the restructuring purpose.

4.1.3 |Shareholder-ism, stakeholder-ism, or claimholder-ism: In the short or

long run?

In viewing more closely the purpose of debt restructuring, two sometimes opposing interests can be

separated: the interests of the creditors and the interests of the owners (shareholders). Usually, these

interests are united, that is, to regenerate the operation of the company to be profitable, so the

According to the recommendation of Bob Wessels and StephanMadaus, member states should ensure that every

restructuring and insolvency framework is grounded in efficient liquidation process that comprises both the options to sell the

debtor's business (or parts of it) as a going concern or to sell individual assets (piecemeal liquidation), depending on the best

return for creditors: Wessels and Madaus, above note 28, 31.

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creditors' claims will be met and the value of shares restored. Creditors strive to recover as much as

possible, whereas the owners strive to survive and regain their position on the market.

However,

when considering the time factor, conflicting interests may occur. On the one hand, there are stake-

holders, especially creditors, whose interests are time related with urgency for the fulfilment.

the other hand, there may be stakeholders whose interests are best served by implementing certain

changes in the business strategy, even if it takes some time.

Restructuring an enterprise in a manner that brings high profit but not until years later may be in

the interests of shareholders, especially when the share possession is based on a long-term invest-

ment. However, the time factor is critical for creditors and, usually, they are unable or unwilling to

wait for the fulfilment of their claims for a long time. Moreover, postponement of the payments to

the creditors adds costs, such as interest payments and fees for pledges. The situation may be difficult

due to the outdated production systems, the lack of intangible resources, or for other similar reasons,

and it is not possible to get the business profitable in the near forthcoming years. Then, usually, it is

inevitable that the business exits from the market through liquidation proceedings. The time factor is

linked also to sustainability: Commitment to make expensive investments for the protection of the

environment is not rational in restructuring when it does not improve profitability in the interests of

the creditors.

In restructuring proceedings, from a strong sustainability viewpoint, it would be justified to

reorganise the business by giving preference to environmental resources. Maybe it would be reason-

able to finish the part of the production that pollutes surroundings and to invest in a cleaner tech-

nique. However, perhaps just that part of the debtor's business is profitable, and the administrator or

the debtor-in-possession (“DIP”) has to consider the creditors' interests. If closing that part of the

business or changing it to a green industry is against the interests of the creditors, it is not justified,

even if it is, in the long term, the right strategy from a sustainability and/or shareholder viewpoints.

It may be predictable that, in the long run, the market requires a green strategy for an enterprise to

reach steady profitability. However, creditors usually cannot wait that long. Thus, in restructuring

proceedings, a balanced operation that makes sustainable solutions possible is necessary when it

helps to reorganise the business in a manner that is not against the interests of the creditors. More-

over, crises can provide an opportunity for making easier radical changes compared with stable

periods.

Insolvency may be an alarm clock for many quite easy and rapid changes in operations,

inter alia, for saving energy, reducing waste in operations, and motivating employees—in the interest

of all stakeholders.

An interesting conflict exists between the creditor-friendly time factor in restr ucturing and the pol-

icy according to which socially responsible companies resist short-term gains and profits. Compro-

mise is needed on a case-by-case basis to balance creditor satisfaction and sustainability. Creditors'

interests cannot displace, for example, the decent welfare of the workers.

4.1.4 |Pluralism of interests in restructuring

A general tendency towards the pluralisation of interests in insolvency proceedings is spotted. This

tendency:

highlights the changing scope of insolvency regimes, from a creditor-bargaining

approach in the direction of a social benefit approach. No longer are the creditors'

Bauer and Krasodomska, above note 17, 25.

See also Boon (above note 28).

Sahut et al., above note 12, 161.

224 LINNA

interests the sole interests that are taken into consideration; this is expanded to include

a wider variety of interests.

This depiction is, arguably, quite correct also from sustainability perspective. It is a matter of

balancing: to what degree can other interests, such as the protection of human, social, or ecological

resources, be seen as “stakeholders.”

To answer that question, the angle of analyses should be extended by asking why other means

available for creditors to protect themselves, especially via contract, are not enough. When voluntar-

ily entering agreements, creditors have an opportunity to protect themselves, inter alia, through secu-

rities, whereas other stakeholders usually do not have this opportunity.

In cases where the ex ante

protection is not possible, creditors usually can yield higher interest rates or correspond ing compen-

sation for higher risks.

Even from this perspective, it is not reasonable or realistic to require that creditors should be in all

everyday businesses pronouncedly careful and protect themselves. This kind of safety is costly and

against flexibility in the market. However, remembering that the primacy of creditors' interests in

insolvency proceedings is not the only imaginable instrument for protecting creditors helps put the

matter in scale. From this viewpoint, there is no reason to suggest that creditors' interests should

totally exclude the interests of other stakeholders.

When important social or ecological capital is in danger exceeding the interests of a single stake-

holder and approaching the public interest, the claims of creditors have to step aside to some extent.

Determining to what extent is a task of the legislator to regulate. After this balancing has been made

in legislation (or in case law), legal certainty exists, and the creditors can adapt their operation to

these conditions.

4.1.5 |Viability and sustainability

Usually, the requirement for debt restructuring is that the business of the debtor company be deemed

viable. From a sustainability perspective, we can ask what this means. Usually, viability implies prof-

itability in a traditional sense, meaning that “under the line,”there is more income than costs. Cus-

tomary company reporting includes balance sheets and the profit/loss account. Instead, in many

sustainable companies, the accounting bases on so-called Triple Bottom Line cost accounting

(“TBL”) where, in addition to financial figures, social and environmental “costs”are also

considered.

In the EU, the Commission has published Guidelines for reporting nonfinancial information

(2017/C 215/01).

The aim of these nonbinding guidelines is to help companies disclose high-qual-

ity, relevant, useful, consistent, and more comparable nonfinancial (environmental, social, and

Boon, above note 28, 161.

However, in some jurisdictions, there may exist obligatory security-like environmental secondary systems, such as insurances

and guarantees.

Michael Byers, “Directors' Duties in the ‘Vicinity of Insolvency’:Why a Fiduciary Duty to Creditors Should not be

Triggered”(April 2011), 12, available at: ency.ca/en/whatwedo/resources/3-2011lawaward_byers_m_

directors_duties_vicinity_insolvency.pdf>.From a directors' point of view, see, for example, Keay, abovenote 15, 140, 164.

For more details, see John P. Wilson, “The Triple Bottom Line: Undertaking an Economic, Social, and Environmental Retail

Sustainability Strategy”(2015) 43(4/5) International Journal of Retail & Distribution Management 432–447. For practical

(also critical) experience, see Kaushik Sridhar, “Corporate Conceptions of Triple Bottom Line Reporting: An Empirical

Analysis into the Signs and Symbols driving this Fashionable Framework”(2012) 8(3) Social Responsibility Journal 312.

Communication from the Commission. Guidelines on nonfinancial reporting (methodology for reporting nonfinancial

information) (2017/C 215/01).

LINNA 225

governance related) information in a way that fosters resilient and sustainable growth and employ-

ment and provides transparency to stakeholders. The guidelines are stakeholder orientated: compa-

nies are expected to consider the information needs of all relevant stakeholders. They should focus

on the information needs of stakeholders as a collective group, rather than on the needs or prefer-

ences of individual or atypical stakeholders, or those with unreasonable information demands. As

appropriate, this may include, among others, investors, workers, consumers, suppliers, customers,

local communities, public authorities, vulnerable groups, social partners, and civil society.

In restructuring, there is no obligation to start TBL accounting, nonf inancial reporting, integrated

reporting, or other alternative accounting or reporting method. Then again, as long as the alternative

accounting or reporting method does not add any major costs, there is no deterrence to start it. How-

ever, if alternative accounting or reporting would demonstrate the poor state of the company in a

sustainability-friendly market, it is reasonable, in the interests of the creditors, to consider whether

TBL accounting in the short term will promote the profitability of the company. Reporting traditional

one bottom line profitability may be in the best interest of the creditors. A more fundamental and

strategic change in operations towards sustainability and reporting the success in that path can be

postponed and started later.

In national restructuring proceedings, the tasks and powers of the insolvency administrator

vary greatly. In DIP systems, the management (original or changed) plays an important role

making decisions concerning, inter alia, sustainability policies. In systems where the administra-

tor, usually with the help of the creditors, has the active role, management loses its powers over

the day-to-day operation of the company, and the administrator has to take responsibility for the

restructuring strategy within the limits of the restructur ing plan.

The administrator should have

the skills to determine how integrating sustainability affects the company's bottom line in the

short and longer term.

4.1.6 |Accommodation of restructuring to the previous business strategy

If the object of the restructuring proceedings is an already-sustainable company, continuing TBL

accounting and/or nonfinancial reporting probably is, in most cases, reasonable for maintaining mar-

ket approval. However, if the reasons for financial distress date back to the “oversustainable”opera-

tions of the debtor company, with too strong an emphasis on, for example, the environment or the

interests of workers or consumers, the reorganisation of the operations may focus on these functions.

Whether traditional profitability improves in the short term by refraining from superfluous sustain-

ability, it has to be implemented for creditors' satisfaction. Instead, when the company's sustainability

strategy is on an appropriate level vis-à-vis the requirements of the market, and compared with the

competitors, it is not wise to take a risk concerning the profitability by slimming down sustainability

functions.

Companies in financial distress may have followed in their previous operation different strategies.

Some of the companies have focused on short-term profit maximising or operating a business in exit

terms (“shareholder-ism”). As mentioned above, some companies may have concentrated on sustain-

ability in their long-run operation through stressing consumers or workers' interests or environmental

protection (“stakeholder-ism”). Undoubtedly, there is a broad range of strategies and modifications

between these edges. According to many jurisdictions, the law allows directors to consider other

However, directors may havesome residual functions and owe duties to creditors during formal insolvency proceedings,

perhaps also regarding CSR. See Jingchen Zhao and John Tribe, “Corporate Social Responsibility in an Insolvent

Environment: Directors' Continuing Obligations in English Law”(2010) 7 International Company and Commercial Law

Review 330.

226 LINNA

interests as long as they relate to the long-term interests of shareholders. This is a sign of a pluralist

corporate governance.

Long-term management is linked to—at least financial—sustainability. Sustainability will prevent

short termism:

for the company must ensure that its value will continue to develop and that wringing

out profits today does not mean insolvency tomorrow. So, there is a need to achieve a

balance so as to ensure both survival and growth.

Here again, the interests of the creditors must be considered (“claimholder-ism”). The state of

affairs may be complicated; due to shareholder-ism, the company may be too sustainable to be profit-

able in the market where consumers or f inancing are not strongly sustainable oriented. Perhaps for

ideological reasons, a family-owned company might operate in a costly and “oversustainable”manner

by refusing to use certain chemicals or methods that are permitted and commonly used by competi-

tors, even if they are not the best possible choice from an ecological perceptive. Creditors' interests,

as well as the purpose of restructuring, then require the abandonment of the too costly sustainability

and adjustment of the business to suit the market. Otherwise, the reorganisation of the company's

operation is not possible, and the creditors' interests are not considered properly.

In cases like this, restructuring the distressed business occurs through one bottom line profitabil-

ity. Many times, it is the only way for the creditors to get their claims met. However, when the credi-

tors themselves are ready to participate in sharing the costs of sustainability for image reasons,

emphasising sustainability is acceptable. For example, if the creditors of a mine industry are finan-

ciers, which include sustainability in their current business strategy, the mutual understanding pre-

vails, and the creditors may be ready for a stronger “haircut”or they may wait longer for their return.

4.1.7 |A fresh start with a clean slate and fresh money

As a rule, the success of restructuring depends on whether the distressed company is able to attract

new or interim financing. Interim financing means a kind of bridge fund for covering the period

needed for negotiate out of financial distress. New financing, in turn, means funds needed to imple-

ment the restructuring plan (reorganisation of the business). In practice, the availability of financing

is a key factor in any effective corporate rescue regime.

Nowadays, many financiers and banks in the f inancing market favour funding sustainable busi-

nesses. However, finding financing for distressed businesses to be developed towards sustainability

to meet market requirements through investments in green technology or consumer service may be

difficult, especially in a general economic downturn.

Renée Adams, Amir Licht and Lilach Sagiv,“Shareholders and Stakeholders: How do Directors decide?”(2011) 32(12)

Strategic Management Journal 1331.

Keay, abovenote 1, 693.

Jennifer Payne and Janis Sarra, “Tripping the Light Fantastic: A Comparative Analysis of the European Commission's

Proposals for New and Interim Financing of Insolvent Businesses”(2018) 27 International Insolvency Review 182. For

analyses concerning safe harbour and priority for new and interim finance, see Wesselsand Madaus, above note 28, 216. In

Recommendation 2.01, they note that member states should ensure the administrator of the estate (insolvency practitioner or

DIP) has the right to take out interim financing based on its own discretion to the extent that is obtained to continue a business

as usual and, by doing so, to preserve the going concern value of the debtor's estate.

For example, the credit crisis of 2007 suppressed the access to financial facilities, hampering successful restructurings. See

Vriesendorp and Gramatikov (above note 27).

LINNA 227

In some cases, creditors may be exceptionally interested in a strategy that steers the development

of the business in the restructuring plan. Especially, when owing a “trigger”clause, a lender can

replace senior debt to equity (“loan-to-own”) and become a shareholder.

Then, a creditor is looking

at the company from an owner's perspective, having a growth in mind. Compliance with a corporate

sustainability policy may attract financing thanks to the improvement of the company's reputation

among investors and banks, perhaps opening access to new markets.

4.2 |Acute environmental hazards in restructuring proceedings

Like in bankruptcy, in debt restructuring proceedings, there may be an acute environmental hazard

damaging or threatening the environment and neighbourhood. As the purpose of the restructuring is

the continuation of the debtor's business, there is no excuse for why the debtor company would not

be responsible for environmental problems, like all other operators.

The calculations regarding the predictions of whether the business could become profitable again

through restructuring should include environmental costs. They may be so high that all the profits of

the company have to be used up to repair the environmental problems caused by the previous opera-

tion. That is against the interests of the creditors. However, when the law requires reparations, there

is no other choice if the business continues. Otherwise, the restructuring scheme is against the law

and additionally causes a biased and unfair competitive situation in the market as one of the actors

avoids obligatory costs. Running the debtor company into bankruptcy may not improve the situation

of the creditors. If the environmental hazard is acute, as above-mentioned, there may be an obligation

to act to prevent or limit the environmental harm, even in bankruptcy, as far as the estate has funds.

The environmental authorities may have the power to impose an administrative fine, compelling the

estate to act.

If the distressed company has previously operated in a manner that neglected environmental or

other sustainability responsibilities, the creditors who got payment during that operation gain an

unjustified advantage at the expense of sustainability. Later, creditors bear the loss when the business

ends up in insolvency. In this way, the application of the pari passu principle is limited only after the

opening of insolvency proceedings, not covering different “generations”of creditors beyond that.

Action for recovery is a way to even out the competition between creditors. However, ignored sus-

tainability responsibilities can hardly be deemed a detrimental act. Thus, it is crucial that a creditor

be careful when noticing that the manner of operation of the company accumulates competitive “sus-

tainability debt.”Actually, nature may be the biggest “creditor”demanding costly actions.

4.3 |The Restructuring and Insolvency Directive

A communication paper from the Commission titled “Europe 2020: A European Strategy for Smart,

Sustainable and Inclusive Growth”notes that a strategy is needed to turn the EU into a smart, sus-

tainable, and inclusive economy delivering high levels of employment, productivity, and social cohe-

sion. Promoting CSR has also been seen as important in the Europe 2020 strategy. In its innovation

policy, the Commission has promised to work, inter alia, to develop a research agenda focused on

challenges, such as climate change, resource efficiency, and environmentally friendly production

methods and land management.

For DIP financing, see Payne and Sarra (above note 49).

Sahut et al., above note 12, 165.

Communication from the Commission. COM (2010) 2020, 8, 10 and 15.

228 LINNA

4.3.1 |The degree of awareness of sustainability

Against this background, not much “sustainability talk”is included in the Restructuring and insol-

vency Directive, though something can be found that refers to sustainability. Concerning the objec-

tive of the Directive, recital 1 notes that the objective is to contribute to the proper functioning of the

internal market and remove obstacles to the exercise of fundamental freedoms, such as the free move-

ment of capital and freedom of establishment, which result from differences between national laws

and procedures concerning preventive restructuring,insolvency, discharge of debt, and disqualifica-

tions. It is noted that the Directive aims to promote the rescue culture in the EU, and besides eco-

nomic gains, there will also be positive social impacts. In the recital (at 16), it reads, inte r alia, that

removing the barriers to the effective restructuring of viable debtors in financial difficulties contrib-

utes to minimising job losses and losses for creditors in the supply chain, preserves know-how and

skills, and hence benefits the wider economy.

Compared with the EU Commission proposal for the Directive (COM/2016/0723, final) some

signs for giving more weight to sustainability can be detected. Especially, the protection of workers is

underlined in the final Directive.

As mentioned above, continuation is one of the core elements of sust ainability. The same element

is visible in the Directive recitals (noting that restructuring should enable debtors in financial difficul-

ties to continue business, in whole or in part) and in Article 2(1)(1), where “restructuring”is defined

as changing the composition, conditions, or structure of a debtor's assets and liabilities or any other

part of the debtor's capital structure, such as sales of assets or parts of the business and, where so pro-

vided under national law, the sale of the business as a going concern, as well as any necessary opera-

tional changes, or a combination of those elements.

The main idea in the Directive, preventive restructuring, is in line with sustainability in two ways.

First, the purpose of preventive restructuring is to retain existing resources by trying to ensure the

continuation of the viable business (internal sustainability). Second, preventive restructuring, as a

procedure, is intended to work efficiently and without weighty administration (external

sustainability).

However, from a sustainability viewpoint, the Directive is neither clear nor comprehensive, and it

is not deeply sustainability aware (compared with Europe 2020 strategy). One might say that the

Union legislator had no “green”restructuring in mind, and concerning different kinds of resources,

financial capital is essential. To some extent, human capital, in the form of worker protections, has

been considered. Instead, for example, ecological aspects have been overlooked.

To conclude, the Restructuring and insolvency Directive is in line with sustainability concerning

manufactured capital, as well as some parts of human capital (employees), but it is narrow regarding

other fields of sustainability.

4.3.2 |Stakeholders and other “holders”

One interesting question is to what extent the discussion concerning corporations with different kinds

of emphases (“isms”), such as shareholder-ism, stakeholder-ism, and claimholder-ism, is visible in

the Directive. From a sustainability approach, the wider the approach concerning different kinds of

capitals, the better.

It is not easy to say where the emphasis of the Directive is located. The term “affected parties”

refers to creditors or classes of creditors and, where applicable under national law, to workers and

those equity holders whose claims or interests are directly affected under a restructuring plan (see

Article 2(1)(2) of the Directive). The Directive, inter alia, grants workers as affected parties the right

LINNA 229

to vote on restructuring plans (Article 9(2) of the Directive). The concept of affected parties does not

mean all stakeholders

whose rights the restructuring affects.

The Directive uses the term “stakeholder”in a general meaning. Recital 3 uses the wording “cred-

itors, workers and other stakeholders”. According Article 4(6), Member States may put in place pro-

visions limiting the involvement of a judicial or administrative authority while ensuring that rights of

any “affected parties and relevant stakeholders”are safeguarded. Article 19 (Duties of directors) uses

wording “the interests of creditors, equity holders and other stakeholders”. The Directive is silent in

terms of what is more specially meant by “stakeholders.”It may refer to those who would be affected

parties after starting the preinsolvency proceedings, but it likely refers to a more extensive group of

financial interests. Nothing refers to other kinds of resources.

4.3.3 |Second chance

Finally, one interesting point is the purpose of the Directive to make a “second chance”possible, but

for whom? Let us think of shareholders and other investors with a rapid exit in mind: they may be

not interested in continuing but turn down the company as soon and as profitably as possible.

Accordingly, their desire is not a second chance but, in order to maximise the selling price, an attrac-

tive “first chance”for the buyer. That is the way the previous owners will be satisfied in a short-term

business. From a sustainability approach, again, it does not matter whether it is a second or first

chance. The only thing that matters is that valuable resources are not wasted.

However, in practice, valuable resources can be wasted. In many jurisdictions, a high percentage

of the businesses rescued fails within the near future.

It is important that the rescue system be able

to balance value maximisation with th e prospect of future survival. Stephan Madaus formulated the

basic idea as follows:

A rescue plan proposal is comprised of an analysis and a prediction. The analysis

explains the current state of the business, thereby portraying where things went wrong

for an insolvent company. Based on these assumptions, the plan proposes the measures

required to turn the business around. It is at this point that uncertainty often arises as

the proposed measures cannot guarantee success. It is the prediction of future business

developments that thus sells every rescue plan proposal.

The Directive does not define the concept of “viability”(cf European Parliament Report

21.8.2018, Committee on Legal Affairs, concerning the draft Directive where “viable”according to

Article 2(15b) means the ability to provide an appropriate projected return on capital after having

covered all costs, including depreciation and financial charges).

The most disadvantageous outcome is an unsuccessful restructuring, during which valuable

resources will be wasted for nothing. Continuing persistently, a debtor's unprofitable business and

using natural and other resources in vain means a double failure from creditors' viewpoint and from a

sustainability perspective: the loss of resources without compensation. In this case, at the end of the

day, all efforts towards rescuing the business become unfeasible. Thus, the debtor's business ends

For a compact presentation on different kinds of stakeholders, see Bauer and Krasodomska(above note 17). There are three

groups of stakeholders: constitutional, contractual, and contextual stakeholders. Additionally,within the stakeholder theory,

there exists two branches: the ethical branch and managerial branch.

See Bolanle Adebola, “An Invitationto Encourage Due Consideration for the Survivability of Rescued Businesses in the

Business Rescue System of England and Wales”(2017) 26 International Insolvency Review 129.

Madaus, above note 30, 216.

230 LINNA

and no property is left for selling or that has to be used to pay for the new financing with priority.

From this viewpoint, selling the debtor's property or business in time in restructuring proceedings or

shifting to liquidation proceedings is justified. Selling means recycling the resources elsewhere in the

market and at least some compensation for creditors.

Where the restructuring includes selling part of the debtor's business as a going concern, the buyer

must make a “rescue plan”and consider whether the business is a faded or a fruitful branch. In the

end, the buyer must consider the future survival of the rescued business. For this, the buyer needs

information (such as an independent viability report).

An “informed buyer”probably promotes sus-

tainability, enabling a more conscious and controlled shift and hopefully promoting the survival of

the business.

5|CONCLUSION

This article presents some preliminary thoughts concerning sustainability and insolvency proceed-

ings. Sustainability in business operations has been analysed mainly from the CSR perspective,

whereas sustainability in terms of insolvency proceedings has received less attention. This study evi-

dences that there are many significant links between sustainability and insolvency, and a sustainabil-

ity framework deepens and enriches analyses on insolvency proceedings.

Sustainability is not a primary purpose for insolvency proceedings, but as a part of modern busi-

ness management and strategy, sustainability influences liquidation and restructuring proceedings, as

well. Depending on the sustainability orientation of the markets, the insolvency administrator must

be aware of these effects.

In liquidation proceedings, the possibility of promoting sustainability is quite restricted. Usually,

the time limit is short and the main rule is that the administrator is not allowed to favour sustainabil-

ity in a manner that increases costs unless they will be rewarded by a surplus in the selling price.

Sometimes, however, “green”or otherwise sustainable bankruptcy management is in the interests of

the creditors due to market requirements or consent of the sustainable-oriented lenders and other

creditors.

From a sustainability perspective, it is essential that different kinds of resources be preserved in

an optimal way, that is, as much natural, manufactured and human capital will be conserved as possi-

ble. In a sustainability agenda, it is not important who possesses the resources, as long as they are

used responsibly. This approach is not, as such and in all cases, acceptable in liquidation, as the inter-

ests of the creditors require maximum financial compensation for the transition of resources outside

the estate.

The question is whether creditors' right to maximum compensation should override sustainability.

It is doubted that there is an omnipotent answer to this question. On a general level, the suggestion

might be made that the loss of important resources in a way that damages public interest should jus-

tify withdrawing from maximal creditor satisfaction: bearing in mind that, usually, creditors are able

to protect their interests in advance, inter alia, through securities. At the very least, in an acute envi-

ronmental hazard, “someone”has to act. If not otherwise provided in the law, the bankruptcy estate

with assets has to act and prevent or repair the damage, even if the operation of the debtor company

is not continued for sale purposes. It is a political matter to what degree society is ready to take part

in paying these costs when the estate has assets.

Adebola, above note 55, 151.

LINNA 231

The purpose of restructuring is the continuation of the debtor's business. Accordingly, many

stakeholders' interests must be considered. Their common interest is in restoring the profitability of

the debtor's business. If a strategy for sustainability is what the markets and thus profitability require,

this is a sound direction for reorganisation. However, from the creditors' perspective, the time factor

is important. The creditors cannot always wait with their claims until the debtor's business is

reorganised into a sustainable corporation. It depends on the time, costs, and prognoses concerning

future profitability, whether to choose green or otherwise sustainable reorganisation or open (or shift

to) liquidation proceedings. Trying too hard and too long ends in the worst possible outcome: all

resources have been used without reaching profitability. A better result, also from the sustainability

perspective, is a well-timed selling of the assets or business of the debtor.

This article demonstrates that there are no simple answers as to how to balance the purposes of

insolvency proceedings and sustainability. When sustainability is what the market requires, the estate

must determine whether there are ways to reach these requirements within the purpose of the insol-

vency proceedings. When sustainability is what sustainability requires, we face fundamental choices.

The reality is that markets would not work properly if the interests of the creditors were not taken

seriously. This does not mean overall maximisation of the creditors' return at the expense of public

interest, especially concerning ecological resources, which are pronouncedly in joint possession con-

necting generations.

How to cite this article: Linna T. Insolvency proceedings from a sustainability perspective.

Int Insolv Rev. 2019;28:210–232. https://doi.org/10.1002/iir.1345

232 LINNA

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