Why We Should Change Our Attitude Towards Distressed Firms

Nicos Zafiris

Economic Affairs, 2018, vol. 38, issue 1, 74-87

Abstract: This article surveys ‘creditor†friendly’ and ‘enterprise†friendly’ bankruptcy regimes with a focus on the methodology underlying the filter test in distress, as reflected both in its academic treatment and in legal practice. I find that the test exhibits pro†liquidation bias in designating liquidation of a firm with recovery potential as the Type II error, and in underplaying the benefits of a possible turnaround. Further influences militating against continuation include the power conferred on creditors through the balance sheet criterion and the undervaluation of intangible assets. I make the case for reversing such biases to establish a presumption in favour of continuation.

Date: 2018
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