Abstract

http://ssrn.com/abstract=303719
 
 

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The Search for Someone to Save: A Defensive Case for the Priority of Secured Credit


Riz Mokal


University College London (UCL) - Faculty of Laws; World Bank Global Initiative on insolvency and Creditor/Debtor Regimes; 3-4 South Square Chambers



Abstract:     
The priority of secured credit has repeatedly and famously been attacked for allowing the exploitation of certain types of unsecured creditor. It has also been blamed for creating inefficiencies. This paper examines these arguments specifically as applied to the UK, and using both theoretical analysis and recent empirical data, suggests none of them can be sustained. It is argued that security is unlikely to lead to the exploitation of involuntary, "uninformed", or "unsophisticated" creditors, since the perverse incentives it allegedly creates for the debtor's management are likely to be outweighed by the managers' liquidation-related costs. It is then pointed out that both exploitation-based and inefficiency-based attack on the priority of secured credit depend on the assumption that secured credit is generally cheaper than unsecured credit, and further, that this is why debtors prefer to borrow on a secured rather than unsecured basis. Recent evidence from the UK (hereafter, "this jurisdiction") is used to challenge this assumption. This has dramatic implications for the attacks on security, which are discussed. The paper concludes with the demonstration that secured credit, by inducing creditors to lend when they would not do so without being offered priority, is mutually value-enhancing for all types of creditor, including unsecured ones.

Number of Pages in PDF File: 40

JEL Classification: D23, K19, K22, K39

working papers series





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Date posted: March 19, 2002  

Suggested Citation

Mokal, Riz, The Search for Someone to Save: A Defensive Case for the Priority of Secured Credit. Available at SSRN: http://ssrn.com/abstract=303719 or http://dx.doi.org/10.2139/ssrn.303719

Contact Information

Riz Mokal (Contact Author)
University College London (UCL) - Faculty of Laws ( email )
London WC1E OEG
United Kingdom
+44 - (0)20 - 7679 1406 (Phone)
+44 - (0)20 - 7679 1461 (Fax)
HOME PAGE: http://www.ucl.ac.uk/laws/
World Bank Global Initiative on insolvency and Creditor/Debtor Regimes
The World Bank
1818 H St NW
Washington, DC 20433
United States
3-4 South Square Chambers ( email )
3/4 South Square
Gray's Inn
London, WC1R 5HP
United Kingdom
HOME PAGE: http://www.southsquare.com/
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