Tax Claims, Government Priority, Absolute Priority and the Resolution of Financial Distress

26 Pages Posted: 11 Sep 2014 Last revised: 1 Jun 2016

See all articles by Timothy C. G. Fisher

Timothy C. G. Fisher

University of Sydney, School of Economics

Ilanit Gavious

Ben-Gurion University of the Negev

Jocelyn Martel

ESSEC Business School

Date Written: March 25, 2016

Abstract

We present a model of an insolvent firm that may take advantage of a "soft-touch" government creditor in order to buy time before filing for reorganization, behavior we refer to as "claims substitution." Parameters in the model reflect the enforcement of absolute priority and government priority in bankruptcy. We show that deviations from absolute priority reduce the incentive for claims substitution. We also show that strict government priority is economically efficient. We discuss the implications of our findings for bankruptcy law reform, especially with respect to the priority of tax claims in bankruptcy and the enforcement of absolute priority.

Keywords: financial reorganization, tax claims, absolute priority, bankruptcy law

JEL Classification: G33, G38, K22

Suggested Citation

Fisher, Timothy C. G. and Gavious, Ilanit and Martel, Jocelyn, Tax Claims, Government Priority, Absolute Priority and the Resolution of Financial Distress (March 25, 2016). Available at SSRN: https://ssrn.com/abstract=2494421 or http://dx.doi.org/10.2139/ssrn.2494421

Timothy C. G. Fisher

University of Sydney, School of Economics ( email )

Sydney
Australia

Ilanit Gavious

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
Israel

Jocelyn Martel (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch B.P. 50105
Cergy-Pontoise, 95021
France
33 1 34 43 33 21 (Phone)

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