Divergences and Convergences of Common Law and Civil Law Traditions on Asset Partitioning: A Functional Analysis

Abstract

The purpose of this study is to bring some insights from the civil law tradition to the corporate debate on asset partitioning, which has developed over the last decade in the common law literature. In comparative law study, the possibility that the common law legal system could benefit from solutions developed under the civil law tradition with respect to the partitioning of assets has been essentially overlooked. Therefore, the purpose of this research is to create a two-way dialogue between the common law and civil law traditions regarding this particular area of law, and to reveal efficient solutions developed in continental Europe. Asset partitioning can be defined either as the segregation of an owner’s assets from a firm’s creditors, or the segregation of an organization’s assets from its owners’ personal creditors. The latter aspect, in particular, has been emphasized by H. Hansmann and R. Kraakman, who suggest that an organization is truly characterized by such a protection of its assets. The comparative analysis of these various partitioning devices is being conducted in order to help understand the economics of achieving affirmative asset partitioning through the creation of a new legal entity, as opposed to doing so through a property law which grants asset separateness within the boundaries of the same entity. The tentative thesis of this study is that in the former system (common law), there is a sharp trade-off between the costs avoided due to asset partitioning (e.g. lower monitoring costs for specialized creditors), and the benefits lost by not having legal integration take place within a single entity (e.g. information economies of scale). In contrast, the asset separateness doctrine of the civil law tradition, by allowing a legal subject to partition these assets not only outside but also within the boundaries of the same legal subject, successfully overcomes this trade-off.