Europe Follows U.S. to Cut Bankruptcy's Stigma

LONDON – Two centuries after the United States introduced tolerant treatment for bankrupt companies to keep its railroads rolling, Europe is copying that lenience, with Spain adopting a new bankruptcy law on Wednesday and more to follow.

The United States invented corporate reorganization in the nineteenth century as a way of keeping bankrupt railroads on track, and in 1978 it formalized a more lenient approach with the Chapter 11 bankruptcy procedure.

Chapter 11 allows managers to stay in charge of bankrupt companies, and one effect of management continuity has been more company rescues and better returns for creditors. Bankruptcy has become a tool for rescuing debt-laden companies.

Faced with a spate of recent crises at big employers such as Parmalat and Cirio in Italy and Alstom in France, as well as a tougher European Commission stance on state aid, Europe is now borrowing from Chapter 11. Spain adopted a new bankruptcy law on Wednesday, and reforms are underway in France and Italy.

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