Bowers, James W. --- "Security Interests, Creditors’ Priorities, and Bankruptcy" [2010] ELECD 389; in Bouckaert, Boudewijn (ed), "Property Law and Economics" (Edward Elgar Publishing, 2010)

Book Title: Property Law and Economics

Editor(s): Bouckaert, Boudewijn

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847205650

Section: Chapter 12

Section Title: Security Interests, Creditors’ Priorities, and Bankruptcy

Author(s): Bowers, James W.

Number of pages: 49

Extract:

12 Security interests, creditors' priorities, and
bankruptcy
James W. Bowers


A. The debt obligation
`Bankruptcy' and `creditors' remedies' are the labels lawyers give to proce-
dures the law uses to enforce debt obligations. Typically, a debt arises as a
result of a civil obligation of the debtor to make a payment of money, most
commonly because the debtor has promised payment, or less commonly,
because the debtor has committed a tort or invaded some other civil enti-
tlement of the creditor, for which the substantive law provides a payment
obligation as a remedy. Failure to pay permits the creditor to initiate a
process under which the state will seize an asset belonging to the debtor
and sell it. The proceeds of the sale are turned over by the state's selling
agent (typically in individual cases, a `sheriff,' or in collective proceedings,
a `bankruptcy trustee') to the creditor, in payment of the debt obligation.
Djankov, Hart, McLeish and Schleifer (2006) and Armstrong and Riddick
(2003) study the economic consequences of differences in the details of
collection law among jurisdictions.

1. Why debt contracts? The subordination of equity and the resulting
perverse investment incentives
The fundamental postulate of financial economics holds that in a world
with adequately functioning capital markets, capital structure is irrel-
evant. The way in which a project is financed does not affect the value of
that project, or of the firm pursuing it (Modigliani and Miller, 1958). It is
obvious, however, that many firms and individuals finance ...