Balancing competing interests

Bankruptcy proceedings often involve a complex interplay of competing interests. While the needs of creditors typically prevail in these proceedings, societal interests also play a crucial role. It’s clear from case law that Dutch bankruptcy trustees wield considerable discretion when it comes to considering societal interests in bankruptcy proceedings. However, this discretion can lead to legal uncertainty for both creditors and stakeholders, who may struggle to anticipate if and how their interests will be considered.

Understanding bankruptcy proceedings

Bankruptcy is a legal process that occurs when an individual or business is unable to pay their debts. The primary goal of bankruptcy is to ensure a fair distribution of the debtor's assets among creditors. Despite the focus on creditors, bankruptcy affects a wide range of stakeholders, each with distinct and often competing interests.

Society and the environment

A company’s bankruptcy affects various stakeholders. Firstly, consider the creditors to whom the company owes money andare primarily concerned with recovering as much of the outstanding debt as possible. The extent of their recovery depends on how the bankruptcy trustee manages and distributes the assets. Secondly, the company’s employees are also affected by the bankruptcy. With the company potentially shutting down or having to scale back its operations, staff may lose their jobs which can lead to financial insecurity and loss of income and benefits.

But the impact of a bankruptcy can also extend beyond the company's direct circle of stakeholders. The local community that has developed in the vicinity of the company could also be affected. The effects of the economic ripple caused by the company’s closure could be devastating. Local businesses that supply the bankrupt company may suffer a significant drop in sales, which will also affect their own staff. And businesses that rely on the spending power of these workers will also suffer. The community’s overall reduced spending power could result in further job losses and an economic downturn in the area.

Environmental concerns also come into play. If the company ceases operations, there could be unresolved issues related to environmental cleanup and the handling of industrial waste. This adds another layer of complexity to the bankruptcy proceedings, as trustees must decide whether they will internalise the long-term environmental impact and the associated costs.

Which stakeholders should be treated more equally than others?

When trustees weigh up the interests of all affected stakeholders, creditors may face uncertainty regarding the extent of their recovery. This raises fundamental questions: which stakeholders should trustees prioritise, and to what extent should societal interests influence bankruptcy proceedings? Some argue for a creditor-centred approach, emphasising the need to safeguard the position of creditors. Conversely, others stress the responsibility of trustees to consider societal interests. The question remains as to how trustees can consider these other interests, especially when the interests extend beyond financial interests. Stakeholder and vulnerability theories can help in exploring how the concept of stakeholders in bankruptcy proceedings could be redefined.

Vulnerability and stakeholder theory

Stakeholder theory defines stakeholders as groups that are essential to a company’s existence. This framework suggests including employees, customers, suppliers, financiers, communities and trade organisations as relevant stakeholders. In the context of bankruptcy, this means that trustees should consider the interests of all these groups – not just the creditors.

Vulnerability theory complements stakeholder theory by highlighting how the vulnerabilities of specific individuals and groups should shape the consideration of their interests in bankruptcy proceedings. This theory emphasises the importance of protecting and prioritising those who are most susceptible to adverse outcomes. For example, employees in precarious employment situations, who have limited job security and may find it hard to secure a new job, should be given special consideration. Similarly, communities exposed to environmental hazards as a result of the company’s operations deserve special attention to ensure that any potential environmental cleanup is addressed.

A broader, more inclusive approach

Applying these theories to bankruptcy proceedings involves trustees having to balance the need to maximise creditor recovery with the requirement to protect vulnerable stakeholders. It calls for a broader, more inclusive approach that acknowledges that bankruptcy extends far beyond creditors’ immediate financial interests. In this way, the process will not only be fair and equitable; it will also be socially responsible, aiming to mitigate the broader socio-economic impact of bankruptcy on various stakeholders. That said, expanding the scope of societal interests does present certain challenges. Prioritising societal interests may lead to creditor losses, potentially increasing a company’s cost of capital. Therefore, a delicate balance exists between protecting vulnerable stakeholders and ensuring a conducive environment for business operations by mitigating the associated risks and costs.

The benefit of stakeholder and vulnerability theories

Using stakeholder and vulnerability theories, it is possible to further define the scope and prioritisation of relevant stakeholders in bankruptcy proceedings. This not only enhances the protection of vulnerable parties – it could also foster a more balanced and equitable distribution of value.

This blog is based on a study that was conducted as part of a research internship within the research project led by Jessie Pool.