Court-supervised Restructuring: Pre-bankruptcy Dynamics, Debt Structure and Debt Rescheduling

We analyze the debt dynamics of corporations that reorganize under Belgian court-supervised restructuring, using a unique sample of small corporations. Small firms systematically accumulate unsecured trade credit and unpaid taxes and social contributions in the running up to bankruptcy-reorganization. First, small firms accumulate overdue taxes and social contributions, pushing the government administration in the unintended role of lender of last resort during the pre-bankruptcy period. Second, we find that the pecking order theory and specific trade credit theories predict the levels of trade credit accumulated during the pre-bankruptcy period very well. Our findings suggest that pre-bankruptcy dynamics strongly affect the debt structure at the moment of initiation of the procedure and in this way the ultimate outcome of the restructuring process.