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Solving creditor problems in the twilight zone: Superfluous law and inadequate private solutions

Couwenberg, O. & Lubben, S. J., Jun-2013, In : International Review of Law and Economics. 34, p. 61-76 16 p.

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  • Solving creditor problems in the twilight zone Superfluous law and inadequate private solutions

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DOI

Fiduciary duties are an integral part of the corporate law landscape. The law and economics analysis of these duties, especially the duty of directors to maximize shareholder wealth, shows that these duties fill contractual gaps, saving on transaction costs. Although duties to shareholders are well settled, duties to other participants such as creditors or employees are heavily debated. In this paper, we use an agency theory framework to address the relative efficiency of a duty to creditors, a duty to refrain from wrongful trading, or contractual devices. Such an analysis makes clear what effect these rules have upon the behavior of shareholders and boards and whether these rules can efficiently address agency problems. The upshot of the analysis is that both types of rules protect creditors, but the same can be said of specific contractual solutions. It is therefore unclear if the rules mitigate costs above and beyond what could be achieved by contract. Furthermore, the analysis shows that the type of bankruptcy system matters as well. Creditor protection is best delivered via a board friendly bankruptcy system instead of with a creditor friendly system that includes a wrongful trading rule. The conclusion is that creditor duties, or wrongful trading rules, are superfluous, while private solutions are still inadequate to solve all the agency problems in a way that the proponents of both types of creditor protections aim for. (C) 2013 Elsevier Inc. All rights reserved.

Original languageEnglish
Pages (from-to)61-76
Number of pages16
JournalInternational Review of Law and Economics
Volume34
Publication statusPublished - Jun-2013

    Keywords

  • Twilight zone, Fiduciary duty, Wrongful trading, Agency costs, DISTRESSED FIRMS, BANKRUPTCY LAW, CORPORATE GOVERNANCE, OWNERSHIP STRUCTURE, FINANCIAL DISTRESS, AGENCY COSTS, DEBT, REORGANIZATION, SHAREHOLDER, CHAPTER-11

ID: 5867857