By Adi Marcovich Gross (Reichman University & The Wharton School)
The traditional thinking is that insolvency duties protect creditors. In times of crisis, however, they may lead to a costly wave of bankruptcies. My article, entitled “Insolvency and Systemic Risks: The Macroeconomic Costs of Director Duties in Crisis,” challenges the assumption that director insolvency duties always serve creditor interests, arguing that they can exacerbate economic instability rather than mitigate it.
When managers face personal liability for delayed filings, they may rush into bankruptcy prematurely, resulting in “congestion costs”—a surge in cases that overwhelms courts and floods markets with distressed assets at fire-sale prices. These effects transform what is meant to be a creditor-protection mechanism into an accelerator of systemic risk.
In my article, I use a comparative analysis of Germany, Australia, and the United States during the COVID-19 pandemic to reveal how different legal systems responded to the risk of bankruptcy congestion. By assessing these approaches, I highlight how legal frameworks shape market dynamics, as well as the urgency of intervention and the risks posed by rigid director duties during crises.
To address these risks, I propose a dynamic carve-out model that would provide temporary relief from insolvency duties during Material Adverse Systemic Events (MASEs). Where legal reform is infeasible, I offer alternative contractual solutions, including automatic debt deferrals, which would allow firms to absorb shocks without precipitating premature bankruptcies.
Integrating macroeconomic considerations into insolvency law reframes the role of director duties in corporate governance and financial markets. Rather than treating insolvency purely as a micro-level issue of firm discipline, I argue that insolvency law should function as an instrument of macroeconomic stabilization and that flexible insolvency frameworks are essential for that purpose.
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