Abstract

The overall economic objective of rehabilitation procedures is to enable a financially distressed enterprise to become a competitive and productive participant in the economy, thereby benefiting not only the stakeholders of the enterprise (owners, creditors, and employees) but also the economy more generally. For a rehabilitation procedure to achieve this objective, it must create incentives for all stakeholders to participate in the proceedings, or—when necessary—prevent some stakeholders from undermining it. Thus, for example, the features of the procedures must be sufficiently attractive to encourage debtors to commence proceedings sufficiently early on in their financial difficulties, thereby increasing the chance of rehabilitation. On the other hand, the rehabilitation procedure must provide sufficient protection to creditors to gain their confidence that it will not be used merely as a device by a nonviable enterprise to delay liquidation, during which time the value of their claims will deteriorate. To ensure that the rehabilitation achieved under the procedure will provide for long-term competitiveness rather than merely a temporary respite, the insolvency law (and other relevant laws) must avoid placing undue constraints on the type of restructuring that can take place. Thus, for example, a rehabilitation plan should be able to provide for debt-for-equity conversions, as well as for the restructuring or forgiveness of debt.