Solving Creditor Problems in the Twilight Zone: Superfluous Law and Inadequate Private Solutions
University of Groningen - Faculty of Spatial Sciences
Stephen J. Lubben
Seton Hall University - School of Law
January 11, 2012
International Review of Law and Economics, Forthcoming
Seton Hall Public Law Research Paper No. 1871745
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 or a duty to refrain from wrongful trading. 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 is available by contract. Furthermore, the analysis shows that firm ownership structure matters, and by concentrating ownership of the debt claims, creditors have a mechanism to further protect themselves. 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.
Number of Pages in PDF File: 51
Keywords: twilight zone, fiduciary duty, wrongful trading, agency costs
JEL Classification: K22
Date posted: June 24, 2011 ; Last revised: June 22, 2013
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