Priority Of Creditors Research Articles

Tensions between sanctions and insolvency law: Searching for a model solution with a focus on the European Union and Poland

AbstractThis article explores the conflict between insolvency law and sanctions law, particularly in the context of European responses to Russia's invasion of Ukraine. Historically, conflicts between legal systems have shaped laws, and modern insolvency law continues this struggle by determining creditor priorities in cases where debtors cannot fully satisfy them. The article highlights how recent sanctions, which freeze assets to restrict the economic activities of sanctioned individuals and entities, complicate insolvency proceedings. The European Union, along with Poland, has imposed unprecedented sanctions on Russia, including bans on transactions, asset freezes, and trade restrictions. These sanctions, while aimed at political objectives, often push businesses into insolvency by preventing access to resources. Case studies such as GoSport in Poland, Amsterdam Trade Bank in the Netherlands, and Fortenova in Croatia demonstrate the complexities that arise when businesses linked to sanctioned entities become insolvent. Key issues include the legal treatment of frozen assets, creditor satisfaction, and the potential for sanctioned entities to benefit from bankruptcy proceedings. Poland has revised its sanctions law, introducing provisions for the appointment of independent managers to oversee sanctioned companies, ensuring continued operations without benefiting sanctioned owners. However, uncertainty remains over the management and distribution of frozen assets, with no clear framework in place. The article concludes that insolvency and sanctions law, though often in conflict, must be applied flexibly to address individual cases. A balanced approach is needed to protect creditors while adhering to the political and legal objectives of sanctions.

Creditor Priority in European Bank Insolvency Law: Financial Stability and the Hierarchy of Claims by Sjur Swensen Ellingsæter [Hart Publishing, London, 2023, 280pp, ISBN: 9781509953653, £85.00 (h/bk)

Creditor Priority in European Bank Insolvency Law: Financial Stability and the Hierarchy of Claims by Sjur Swensen Ellingsæter [Hart Publishing, London, 2023, 280pp, ISBN: 9781509953653, £85.00 (h/bk)

Cryptocurrency’s Clash with Bankruptcy: Insolvent Crypto Exchange Companies Create Difficulties for Courts & Customers

This comment explores the novelty of cryptocurrency, its legal ambiguity in the realms of securities, property, and tax law, and the difficulties arising from insolvent crypto-exchange company’s estates within the context of the United States Bankruptcy Code. For the purposes of this comment, individuals who invested in crypto-exchange platforms will be referred to as “customers” rather than “investors” to avoid potential confusion in the context of 11 U.S.C. § 507 of the Bankruptcy Code. Customers who invested with insolvent crypto-exchange companies are concerned about being last in line for repayment of their investments based on traditional bankruptcy creditor priority. These concerns, combined with the alleged mismanagement and undercapitalization of many insolvent crypto-exchange companies, have introduced new issues of legal interpretation and the weighing of various policy concerns both within and outside of the bankruptcy process. By examining the bankruptcy process, the history of cryptocurrency, and analyzing several current cases of insolvent crypto-exchange companies, this comment explores the multi-faceted issues surrounding cryptocurrency as well as the need for guidance and clarity of cryptocurrency’s classification for the purposes of bankruptcy law.

China's practical wisdom: Assumption of liability for endangering public health in bankruptcy proceedings-A case study of the Changchun Changsheng Biotechnology vaccine incident and the Johnson & Johnson baby powder incident.

The assumption of liability for endangering public health has always been a legislative challenge in bankruptcy proceedings. Although it has been theoretically proven that the tort creditor should hold a position higher than that of unsecured creditors in bankruptcy proceedings, both legislation and judicial practice have been found wanting in many countries. China has witnessed large-scale domestic public health incidents where the tort debtor has entered bankruptcy proceedings while the tort claims were being settled. In Changchun Changsheng Biotechnology vaccine incident, to maintain social order and protect the rights and interests of the tort creditor, the Chinese government required the tort debtor to set up a special compensation fund of RMB 500 million and hand it over to a third party for management. This approach was mainly adopted because tort creditors can only participate in the bankruptcy distribution as an unsecured creditor, according to the Enterprise Bankruptcy Law of China, and as a result, their rights and interests cannot be guaranteed. In the context of the Enterprise Bankruptcy Law of China, this approach face predicaments of legitimacy and effectiveness. Moreover, even if the legislators follow scholars' advice and grant the tort creditor priority in bankruptcy proceedings, that would still not be enough to protect the rights and interests of the tort creditor, not to mention the possibility that the tort debtor might follow the example of Johnson & Johnson to avoid liability in practice. In fact, the Chinese government's approach is similar to that of Johnson & Johnson's, but more advisable. The Enterprise Bankruptcy Law of China (Bill of Amendment) will be submitted to the Standing Committee of the National People's Congress for preliminary deliberation this year, and the Chinese government's approach to the Changchun Changsheng vaccine case is very likely to be codified. This will resolve the predicaments of legitimacy and effectiveness that the government's current approach is facing and serve as a point of reference for the future revision of U.S. bankruptcy law and the handling of related cases.

Company Purpose in the Context of Business Sustainability and Insolvency Proceedings

The organizational and operational company purposes of the debtor company terminate in liquidation proceedings. In addition, the nonfinancial sustainability elements vanish in a piecemeal selling. Through a selling as a going concern, the operational company purpose and sustainability elements may be transferred to a byer company. In restructuring proceedings, both the organizational and operational company purposes remain, but the shareholder primacy shifts to a creditor priority. When choosing between liquidation and restructuring proceedings, there are two tests: the viability test and the best-interests-of-creditors test. In these tests, all obligatory non-financial sustainability elements, such as environmental requirements laid down in the law, must be considered. Voluntary non-financial sustainability investments for implementing the company operational purpose are allowed also during the restructuring plan if they benefit the creditors.

An Axiomatization of the Proportional Rule in Financial Networks

The most important rule to determine payments in real-life bankruptcy problems is the proportional rule. Many such bankruptcy problems are characterized by network aspects, and the values of the agents’ assets are endogenous as they depend on the extent to which claims on other agents can be collected. These network aspects make an axiomatic analysis challenging. This paper is the first to provide an axiomatization of the proportional rule in financial networks. Our main axiom is invariance to mitosis. The other axioms are claims boundedness, limited liability, priority of creditors, continuity, and impartiality. This paper was accepted by Manel Baucells, decision analysis.

An Axiomatization of the Proportional Rule in Financial Networks

The most important rule to determine payments in real-life bankruptcy problems is the proportional rule. Many bankruptcy problems are characterized by network aspects and default may occur as a result of contagion. Indeed, in financial networks with defaulting agents, the values of the agents' assets are endogenous as they depend on the extent to which claims on other agents can be collected. These network aspects make an axiomatic analysis challenging. This paper is the first to provide an axiomatization of the proportional rule in financial networks. Our two central axioms are impartiality and non-manipulability by identical agents. The other axioms are claims boundedness, limited liability, priority of creditors, and continuity.

Decentralized Clearing in Financial Networks

We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents’ assets might be insufficient to satisfy their liabilities, leading to defaults. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure. This paper was accepted by Yinyu Ye, optimization.

What Injures a Corporation? Toward Better Understanding Corporate Personality

Understanding what injures a corporation can help us better understand corporate personality. Traditional corporate injury is injury to corporate assets or profits. This makes sense, because without defining impairment to corporate assets and profits as corporate injury, most of what we think of as “essential” about a corporation—locking assets into a protected partition—would be impossible: (1) protecting the going concern value of the corporation; (2) maintaining creditor priority; and (3) contracting through the corporate form. More recent expansions of what constitutes corporate injury, including injuries to a corporation’s right to political speech (Citizens United) and religious freedom (Hobby Lobby), seem at first to fit poorly with existing corporate theory. But corporations can “lock in” and “partition” more than assets; they can partition beliefs and virtues as well. Viewed this way, existing corporate theory (and the idea of corporate injury as harm to whatever is partitioned by the corporate form) may provide more help in understanding corporate Constitutional rights than previously recognized.

The Essential Structure of Property Law

This Article examines a characteristic of property entitlements fundamental to the structure of property systems that has received scant academic attention, a characteristic referred to as the mutual exclusivity principle. According to this principle, a property system does not allow for the existence of incompatible rights. Two people cannot separately be the owners of the same resource, for instance. By contrast, two people can each hold valid but contradictory contract rights to the resource. Although the existing property literature has stressed the “exclusive” nature of property, the various ways in which property is imagined to be exclusive, such as by conferring “rights to exclude,” fail to capture the essence of property as a distinct legal institution. Unlike these alternative conceptions of exclusiveness, the mutual exclusivity principle holds true across the range of different types of property entitlements, including not just fee simple ownership but also security interests and servitudes, and across the range of assets subject to property law, including not just land and physical objects but also intangibles like intellectual property and corporate shares. Recognizing the role of the mutual exclusivity principle yields a number of practical insights. It helps explain various institutional features of property law, such as the system of future interests, the use of possession-based rules, the role of recording systems, and the negative, thing-based structure of property entitlements. It illuminates connections between property and other fields like corporations law and it calls into question aspects of existing doctrine, such as the preferred status of exclusion rights under the U.S. Constitution’s Takings Clause. It also modifies the influential theory that property law is heavily shaped by problems of high information costs: while existing accounts seem to suppose that property law entails relatively high information costs because it imposes a relatively broad set of duties on others, many of the information cost problems identified in the literature actually result from the mutual exclusivity problem, rather than from the breadth of property duties. At a more general level, understanding the centrality of the mutual exclusivity principle suggests some change in direction is called for within the wider property literature. American property scholarship has been preoccupied with questions about the scope and strength of property rights, overlooking the separate problem of ascertaining who happens to hold a given right, a problem distinctive to property law. Property, this Article argues, is at least as much about title chains, patent searches, and creditor priorities as it is about trespass, remedies, and eminent domain.

When Contractual Rights are Better than Constitutional Rights: Addressing Puerto Rico's Debt Crisis Through Constitutional Amendment

Constitutional rights are commonly considered the most fundamental, most protective of rights. Yet, in the context of public debt, there is a critical difference between constitutional provisions and contractual promises: who wields the power to amend. It generally takes mutual consent for parties to amend a contract, but the Constitution of Puerto Rico can be amended by the people of Puerto Rico by referendum, without creditors’ consent. Creditors understand that local law is subject to change. Creditors who do not want to assume that risk negotiate for explicit contractual protections and insist that another jurisdiction’s law govern the debt. For instance, Puerto Rico’s latest bonds, issued in 2014, are protected by explicit priority and remedy provisions in the language of the contract and are governed by New York law (hereinafter “NY law bonds”). The NY law bonds account for only about $3.5 billion of Puerto Rico’s $17 billion in general obligation (“GO”) debt. Accordingly, if Puerto Rico amended its Constitution it could reprioritize public spending over the significant majority of its general obligation bonds, those governed by Puerto Rican law (“PR bonds”). Puerto Rico can wield this power to encourage PR bond creditors to restructure. Right now, Puerto Rico’s pleas to restructure are more likely to fall on deaf ears since creditors can sue for payment from tax revenues. Reasonable investors may understand that a healthy, sustainable Puerto Rico will enhance their likelihood of sustainable payments in the future, but possible holdouts create real fears that those who restructure will bear the brunt of the crisis without fellow creditors carrying their fair share. Indeed, a creditor lawsuit could jeopardize a sustainable recovery even if reasonable creditors agree to haircuts. A constitutional amendment could check the extraordinary priority of creditors to pave the way for a productive refinancing.This paper will briefly examine the danger that holdouts pose to the refinancing process. It will then explain how the vulnerabilities of the PR law bonds’ enforcement mechanisms can be used to encourage restructuring. Finally, it will answer possible critiques of the plan and address potential legal challenges.

Entrepreneurship and the Legal Form of Businesses: The Role of Differences in Beliefs

Abstract Entrepreneurship has been considered a way to implement interpersonal authority, i. e., to convince other persons to use their resources in an alternative way to the optimal one in accordance with their beliefs. This paper presents a theoretical model that relates the above assumption with the following two questions: (i) how and why financial constraints can prevent the implementation of entrepreneurial projects; and (ii) how creditors’ priorities provided by the different legal forms of the business can reduce the financial requirements for implementing the firm. The attractiveness of such an explanation lies in its capacity to justify a wide array of features of firms (entrepreneur origin, property rights, authority, financial constraints and creditor priorities) from a single basic assumption: agents have different beliefs about how production should be organized.

Decentralized Clearing in Financial Networks

We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. We assume the primitives to be denoted in some unit of account. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. We present a convenient representation of bankruptcy rules. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Both clearing payment matrices and the corresponding values of equity are not uniquely determined. We provide bounds on the possible levels equity can take. We analyze decentralized clearing processes and show the convergence of any such process in finitely many steps to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

Employee Priorities in Insolvency Proceedings and Wage Guarantees: A Critical Assessment

In many countries, insolvency regimes alter the distribution of debtors’ assets among creditors, by way of creditor priorities, rules on claw-back actions and on set-off rights. This distributive function of insolvency rules is particularly clear having regard creditor priorities. Many jurisdictions, indeed, in order to protect specific classes of creditors, curb pre-insolvency entitlements deriving from private bargains between a debtor and her creditors. The political decision on whether prioritising certain claims or fully respecting pre-insolvency entitlements reflects the hierarchy of interests that has prevailed in a specific country and the regulatory strategies adopted by policy-makers. Employee priorities are telling examples of these distributive rules. Many jurisdictions, indeed, prioritise employees’ claims for unpaid wages and security payments over claims of other creditors. Employees, however, could also be protected by way of security mechanisms, with the consequence that the impact of employee priorities depends on their interplay with such social security schemes. Employee priorities, in particular, could either equilibrating weaknesses of social security schemes or reinforcing their impact. This work will assess this interplay in a sample of three E.U. Member States: France, U.K. and Germany. These States, according to the traditional ‘varieties of capitalism’ approach, are classified as either ‘liberal market economies’ (U.K.) or ‘coordinated market economies’ (Germany and France). Along this distinction, we expect that the U.K. does not accept insolvency priorities and that Germany and France are open to adopt rules that curb free market entitlements. The current institutional settings ant their historical development only partially reflect this expectation.

Mutual Exclusivity and the Nature of Property

This article examines a characteristic of property entitlements that is fundamental to the structure of property systems that has received scant academic attention, a characteristic referred to as the mutual exclusivity principle. According to this principle, a property system does not allow for the existence of incompatible rights. Two people cannot separately be the owners of the same resource, for instance. By contrast, two people can each hold valid but contradictory contract rights to the resource. Although the existing property literature has stressed the “exclusive” nature of property, the various ways in which property is imagined to be exclusive, such as by conferring “rights to exclude,” fail to capture the essence of property as a distinct legal institution. Unlike these alternative conceptions of exclusiveness, the mutual exclusivity principle holds true across the range of different types of property entitlements, including not just fee simple ownership but also security interests and servitudes, and across the range of assets subject to property law, including not just land and physical objects but also intangibles like intellectual property and corporate shares.Recognizing the role of the mutual exclusivity principle yields a number of practical insights. It helps explain various institutional features of property law, such as the system of future interests, the use of possession-based rules, the role of recording systems, and the negative, thing-based structure of property entitlements. It illuminates connections between property and other fields like corporations law and it calls into question aspects of existing doctrine, such as the preferred status of exclusion rights under the U.S. Constitution’s Takings Clause. It also modifies the influential theory that property law is heavily shaped by problems of high information costs: while existing accounts seem to suppose that property law entails relatively high information costs because it imposes a relatively broad set of duties on others, many of the information cost problems identified in the literature actually result from the mutual exclusivity problem, rather than from the breadth of property duties.At a more general level, understanding the centrality of the mutual exclusivity principle suggests some change in direction is called for within the wider property literature. American property scholarship has been preoccupied with questions about the scope and strength of property rights, overlooking the separate problem of ascertaining who happens to hold a given right, a problem distinctive to property law. Property, this article argues, is at least as much about title chains, patent searches, and creditor priorities as it is about trespass, remedies, and eminent domain.

A Sea Change in Creditor Priorities

This Article argues that the operation of maritime law undermines a primary justification for creditor priorities under U.S. law. Under current law, when a debtor becomes insolvent, its secured creditors will be paid the full amount of their debt to the extent of their security interest, even if that leaves nothing to pay unsecured creditors. This is controversial with respect to involuntary unsecured creditors, particularly those with tort claims against the debtor. Defenders of this scheme of priorities have argued that allowing greater priority to involuntary creditors would hinder the availability or increase the cost of credit. However, involuntary creditors have long enjoyed priority over secured creditors under maritime law, and it does not appear that firms subject to maritime law have experienced these effects. Experience with this priority scheme under maritime law may provide support for efforts to reform current U.S. law to give greater priority to involuntary creditors more generally.

Efficient Bankruptcy Law in the u.s. and the Netherlands

Bankruptcy serves to prevent the arising of a common pool problem and to ensure value maximisation of the debtor’s assets. The question is whether in addition to this goal of value maximization, it is efficient to allow the introduction of new substantive policies in the bankruptcy process as to redistribute wealth. The author, in light of Dutch and American bankruptcy law, compares several theories to answer this question about the goals of bankruptcy. He concludes that the introduction of substantive policies leads to inefficient forum shopping and that and the absolute priority of creditors and shareholders should be warranted as much as possible in bankruptcy.

Getting the World Bank Out of Development's Way: The Case for a Project Finance Exception to the World Bank Negative Pledge Clause

During tumultuous fiscal years of the past few decades, the World Bank, acting in its capacity as lender of last resort, granted unsecured loans to debt-ridden sovereigns. Instead of taking a lien over the state's assets, the World Bank protected its interests via a broadly-worded Negative Pledge Clause. This clause ensures that any lien created on any public assets as security for external debt which results in a priority for a third-party creditor equally and ratably secures all amounts payable by the borrowing state. In short, should such a lien be granted, the World Bank shares in the amounts paid out to the third party creditor, thus preventing the creditor from enjoying senior creditor status and undermining the value of any later-granted lien. Including the Negative Pledge Clause in the World Bank loan agreements helps mitigate the World Bank's risk of providing unsecured loans by ensuring that a developing nation will not give a later creditor priority over its assets. In theory, such a pledge protects both the World Bank, as a creditor, and the sovereign nation, as debtor. However, the barrier that the Negative Pledge Clause constructs around a state's ability to engage with other creditors is so formidable that the clause ends up preventing the state from attracting commercial investment for project financings. As currently drafted, the Negative Pledge Clause dissuades commercial lenders from investing in exactly the kinds of projects that might further development and enrich a nation (thus strengthening the nation's ability to pay back its debts). This is not only unfortunate for the developing countries involved, but also challenge the raison d'etre of the World Bank, a multilateral institution designed to promote development. This article proposes reforming the Negative Pledge Clause by clarifying the language of the text and the consequences of a breach in the way which narrows the breadth of the clause. This article also argues that the World Bank would better achieve its overall purpose of promoting development by including a project finance exception to the Negative Pledge Clause to attract investors to projects that help expand national infrastructure.

Beliefs as Determinants of Team Production: Implications on the Theory of the Firm

This paper considers entrepreneurship as a way to implement interpersonal authority, i.e., to convince other persons of using their resources in an alternative way to the one that accordingly with their beliefs is the optimal one. The main contribution of the paper is to relate the assumption above with the following two questions, (i) how and why financial constraints can prevent the implementation of entrepreneurial projects; and (ii) how creditors’ priorities can cut down the financial requirements for implementing the firm. The legal form of the firm is related to the guarantee of those creditors’ priorities. The attractiveness of such an explanation lies in its capacity to justify a wide array of features of firms (entrepreneur origin, property rights, authority, financial constraints and creditor priorities) from just one basic assumption: the agents have differences in beliefs about how to organize the production.

Employee Entitlements and Secured Creditors: Assessing the Effects of the Maximum Priority Proposal

Corporate failures and consequent default on obligations have, in some circumstances, led to significant losses for employees with accumulated unpaid leave entitlements. The Australian government responded initially to this problem by implementing a government-funded compensation scheme. Subsequently it announced a proposal involving legislating for seniority (maximum priority) of entitlements in corporate liquidation which has not been implemented. This paper analyses and provides quantitative estimates of the consequences of changing creditor priority in this manner. Contrary to conventional wisdom and arguments mounted in opposition to such a change, the effect on corporate funding costs would be extremely small. The paper argues that legislation to effect such a change warrants further consideration as a complement to the existing compensation scheme.