ABSTRACT
Drawing on the work of Ronald Coase, this article takes as its starting point the proposition that, in a world of zero transaction costs, creditors would reach a consensual renegotiation of a financially distressed firm’s capital structure necessary for the firm to return to profitability. There are, however, significant transaction costs in the real world of restructuring: the costs of information, the direct costs of the process, and the costs of strategic behaviour by those with control rights or a ransom position. The controlling argument in the article is that an optimal restructuring law will reduce these costs to make renegotiation more likely and will step in to impose a restructuring if cooperative bargaining nonetheless fails. With this insight in hand, restructuring laws in the US, the UK, and the European Restructuring Directive are analysed, and suggestions are made for each restructuring law to better deliver on these objectives. As far as we are aware, this is the first paper to try to pull the story together through a Coasian bargaining lens and to analyse the problems that have arisen with the UK and Europe’s pragmatic, but perhaps occasionally unprincipled, recent developments, and the historical foundations of US Chapter 11.
Paterson, Sarah and Engelberg, Matti, Restructuring and Bargaining Theory (June 14, 2025).
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