Solving Creditor Problems in the Twilight Zone: Superfluous Law and Inadequate Private Solutions

51 Pages Posted: 24 Jun 2011 Last revised: 22 Jun 2013

Oscar Couwenberg

University of Groningen - Faculty of Spatial Sciences

Stephen J. Lubben

Seton Hall University - School of Law

Date Written: January 11, 2012

Abstract

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.

Keywords: twilight zone, fiduciary duty, wrongful trading, agency costs

JEL Classification: K22

Suggested Citation

Couwenberg, Oscar and Lubben, Stephen J., Solving Creditor Problems in the Twilight Zone: Superfluous Law and Inadequate Private Solutions (January 11, 2012). International Review of Law and Economics, Forthcoming; Seton Hall Public Law Research Paper No. 1871745. Available at SSRN: https://ssrn.com/abstract=1871745 or http://dx.doi.org/10.2139/ssrn.1871745

Oscar Couwenberg (Contact Author)

University of Groningen - Faculty of Spatial Sciences ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
31 50 363 3907 (Phone)

HOME PAGE: http://www.rug.nl/staff/o.couwenberg/?lang=en

Stephen J. Lubben

Seton Hall University - School of Law ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-642-8857 (Phone)

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