The Costs and Benefits of Secured Creditor Control in Bankruptcy: Evidence from the UK

1st Annual Conference on Empirical Legal Studies Paper

University of Cambridge Centre for Business Research Working Paper No. 332

46 Pages Posted: 28 Jun 2006 Last revised: 21 Aug 2012

See all articles by John Armour

John Armour

University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Audrey Wen‐Hsin Hsu

National Taiwan University; University of Cambridge - Centre for Business Research (CBR)

Adrian Walters

Chicago-Kent College of Law - Illinois Institute of Technology

Date Written: March 1, 2009

Abstract

Recent theoretical literature has debated the desirability of permitting debtors to contract with lenders over control rights in bankruptcy. Proponents point to the monitoring benefits brought from concentrating control rights in the hands of a single lender. Detractors point to the costs imposed on other creditors by a senior claimant's inadequate incentives to maximise net recoveries. The UK provides the setting for a natural experiment regarding these theories. Until recently, UK bankruptcy law permitted firms to give complete ex post control to secured creditors, through a procedure known as Receivership. Receivership was replaced in 2003 by a new procedure, Administration, which was intended to introduce greater accountability to unsecured creditors to the governance of bankrupt firms, through a combination of voting rights and fiduciary duties. We present empirical findings from a hand-coded sample of 348 bankruptcies from both before and after the change in the law, supplemented with qualitative interview data. We find robust evidence that whilst gross realisations have increased following the change in the law, these have tended to be eaten up by concomitantly increased bankruptcy costs. The net result has been that creditor recoveries have remained unchanged. This implies that dispersed and concentrated creditor governance in bankruptcy may be functionally equivalent.

Keywords: Bankruptcy costs, contract bankruptcy, secured creditor control, UK, receivership, administration

JEL Classification: G33, K22, G21

Suggested Citation

Armour, John and Hsu, Audrey Wen‐Hsin and Walters, Adrian, The Costs and Benefits of Secured Creditor Control in Bankruptcy: Evidence from the UK (March 1, 2009). 1st Annual Conference on Empirical Legal Studies Paper, University of Cambridge Centre for Business Research Working Paper No. 332, Available at SSRN: https://ssrn.com/abstract=912302 or http://dx.doi.org/10.2139/ssrn.912302

John Armour (Contact Author)

University of Oxford - Faculty of Law ( email )

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University of Oxford - Said Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

HOME PAGE: http://www.ecgi.org

Audrey Wen‐Hsin Hsu

National Taiwan University ( email )

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Taipei 106, 106
Taiwan

University of Cambridge - Centre for Business Research (CBR) ( email )

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United Kingdom
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Adrian Walters

Chicago-Kent College of Law - Illinois Institute of Technology ( email )

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Chicago, IL 60661-3691
United States

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