International Insolvency Law

Themes and Perspectives

Paul Omar, Paul Omar

• Verlag: Routledge
• Jahr: 2017
• ISBN:
  9781351562355
• Auflage: 1
• Thema: Droit
• Thema: Théorie et pratique du droit

International insolvency is a newly-established branch of the study of insolvency that owes much to the phenomenon of cross-border incorporations and the conduct of business in more than one jurisdiction. It is largely the offspring of globalization and involves looking at both law and economic rules. This book is a compendium of essays by eminent academics and practitioners in the field who trace the development of the subject, give an account of the influences of economics, legal history and private international law, and chart its relationship with finance and security issues as well as the importance of business rescue as a phenomenon. Furthermore, the essays examine how international instruments introduced in recent years function as well as how the subject itself is continually being innovated by being confronted by the challenges of other areas of law with which it becomes entangled.

Part I
New Thoughts on Insolvency

Chapter 1
Catholic Social Thought and Corporate Insolvency Law

Armin J. Kammel

Introduction

The year 2008 will enter history as a year of economic trouble, unbelievable scandals à la Madoff, legitimate concerns about an economic downturn, including evident indications of job cuts, and, in particular, numerous companies of all sectors – especially real giants of the American automobile industry as well as several prestigious financial institutions worldwide – faced financial turbulences. Governments hectically lashed together rescue programs for entire industries, invested in financial institutions and tried to coordinate these attempts as well as possible. Nevertheless, times like these usually culminate in populist requests for special facilities of legal frameworks in order to cushion the various economic pressures because many companies face the sword of Damocles in terms of conceivable insolvency.

Against this background, and due to the fact that insolvency law is at the heart of such considerations, this chapter reflects some general thoughts about some theories and the situation of corporate insolvency in a rather provocative manner. As the heading indicates, the purpose of this contribution is to scrutinize some main theories of corporate insolvency law since they – with different success – emboss this field of law. In this regard, this contribution shall not be one among many others but it shall be freaky, eye-catching and provoking. Moreover, and this is essential, it shall be a trigger for further thoughts. A wakeup call seems to be more important than ever because, as analyzed on the following pages, one can diagnose that this field of law is to a certain extent in the uncomfortable situation of a stalemate, meaning that various strands in literature are heavily opposing each other.Additionally, it seems that the main intention of these strands is to attack the other position leading to a stand-off of the discipline. Even worse, due to the close proximity to corporate law, the combats there directly influence and worsen the stalemate situation in corporate insolvency law since they normally back up either the one or the other insolvency law position. Therefore, the dilemma is the lack of successful attempts to bring the various strands in corporate insolvency law closer together instead of cementing a specific position.

Unfortunately, this contribution is also not able to provide the desired panacea. However, it shall be understood as an unorthodox attempt to stimulate some discussion in this regard. From a material point of view, it is important to scrutinize the creditors’ bargain model, the authentic consent model, as well as team production theory, by concluding a rethinking of these positions with tools from catholic social thought, a school of thought that has not left footprints in corporate insolvency law yet.

The Creditors' Bargain

The Creditors' Bargain Model

Whenever a company is unable to pay its debts as they become due, creditors face significant struggles when pursuing their claims. Depending on whether the winding up is compulsory or voluntary, creditors lose their individual ability to pursue their claims. As Mokal points out, the very first formal attempt to deal with such issues in English law was An Act Against Such Persons As Do Make Bankrupts which was passed by Parliament in 1543.¹ In this regard, it is interesting to note that, nearly 470 years later, the issue of struggling unsecured creditors is still hotly debated.

From a dogmatic point of view, corporate insolvency law has for decades been dominated by the so-called Creditors’ Bargain Model (CBM). Despite long being the dominant theoretic model, its discussion has always been ambivalent due to strong voices supporting as well as opposing it. Nevertheless, it still remains the only sustained attempt at a principled analysis of the law governing bankrupt companies and individuals.² The CBM originates from important works done by Thomas Jackson, who developed and further refined it.³ Aside from these merits, Jackson – also in his collaborative work with Douglas Baird – advanced the proposition that the United States’ system of corporate insolvency law was primarily a collective debt collection mechanism,⁴ with its only goal being the maximization of creditors’ returns.⁵ Against this background,it has to be considered that, for Jackson, bankruptcy is a system designed to mirror the agreement one would expect the creditors to form among themselves were they able to negotiate such an agreement from an ex ante position, which consequently leads to Jackson’s assumption that such hypothetical bargains would be efficient, resulting in the product of unfettered bargaining among property owners.⁶

Basically, the CBM states that potential creditors gather together in order to seek opportunities to settle their claims in the case of the insolvency of the company. Here it is important to be aware that CBM defines a company rather as a pool of assets than a relationship among people and assets. Despite this rather narrow view,⁷ attempts to settle the claims lead to a complex multi-party prisoner’s dilemma⁸ which can be explained by their desire to continue with unrestricted freedom of action. In this regard, Jackson underlined that insolvency law procedures are responses to a common pool problem faced by creditors. The so-called common pool problem is well known in the literature of law and economics, as well as in environmental economics. Hardin demonstrates with his famous parable that free access and unrestricted demand for a finite resource ultimately leads to the consumption of the resource through over-exploitation. The consumption results from the benefits of exploitation by the individuals, each of whom wants to maximize their own use of the resource. Moreover, the costs of exploitation are distributed between all the individuals to whom the resource is available. As Hardin points out, the utility to each individual of adding a single animal to its own herd is the value of this animal, whereas the cost to the individual is the consumption of the resources of the respective animal divided by the number of communal owners of the common. Consequently, the benefit to an individual of annexing a resource outweighs the cost where communal resources are concerned. When acting rationally, all individuals of the community will add as many animals as quickly as they can to their own herds, resulting in the fact that the finite resources of the communal land will quickly become exhausted.⁹

Due to conflicting rights and interests, creditors show under these circumstances a tendency in their efforts for debt collection, which can also be described as a ‘first come, first served’ approach leading to an inefficient ‘race to collect’. This means that the creditor first staking a claim to particular assets of the debtor is generally entitled to be paid out first of these assets. In general, there are various ways one can stake a place in line; one way is that the debtor simply pays its creditor off or gives the creditor a security interest in certain assets. In other ways, the creditor can get an execution lien or a garnishment of the debtor’s assets. Moreover, a place in line might also be given to a specific claimant by governmental fiat in the form of a so-called statutory lien or similar devices. Nevertheless, the general rule seems to be that creditors are paid according to their respective place in line for particular assets. This respective place in line is determined by the time the person acquires interest in the assets and then takes the appropriate steps to publicize it. In case of a solvent debtor, the respective place in line does not matter, whereas in case the debtor becomes insolvent, the ranking in form of the respective place in line determines the likeliness of a creditor to become satisfied regarding his claims. Therefore, the faster the creditor is in discovering the financial distress of the debtor, the greater the chances to receive the claimed payments. However, the monitoring of debtors on an individual basis is costly and leads to hazard behaviour having the consequence of dismantling the company’s undertaking and the disposal of its assets piecemeal to satisfy claims already at the stage they arise, which in total might be harmful to all creditors as a group.¹⁰

The Creditors' Bargain Model Examined

When having a closer look at the CBM, one will notice some inconsistencies and soft points which shall be discussed in the following. As these elaborations will indicate, there is a direct connection between the inconsistencies of the CBM and the weaknesses of corporte insolvency law in general. LoPucki even stresses that the CBM sought to destroy the system of bankruptcy and non-bankruptcy entitlements by accepting the entitlements that happened to be lodged in nonbankruptcy law and rejecting those lodged in bankruptcy law.¹¹

Anyhow, when analyzing the CBM, it has to be stressed that apart from the situation leading to a prisoner's dilemma, creditors differ in terms of handling their risks as well as their strategy to get their claims settled. In this regard, some creditors are usually risk-averse, meaning that they rather prefer lower but more secure returns compared to higher but variable ones. Consequently, risk-averse creditors tend to participate in a bargain which then per se restricts the individual freedom of action in case of the debtor being in distress. In other words, the bargain of risk-averse creditors in a similar position as a collective mechanism replaces the individual actions. However, these creditors accept such constraints due to the promise of a lower but more certain return on the loans, as well as the cheaper monitoring expenses. Deriving from this, the CBM logic is that a meeting of potential creditors in order to settle future claims is cheaper ex ante before the actual lending. Nevertheless, the difficulty is that by then it is highly uncertain who lends what and what claims might arise. The prediction of the CBM basically includes what would be agreed by real-life creditors if they could mee...