Control Rights, Debt Structure, and the Loss of Private Benefits: The Case of the UK Insolvency Code

Julian R Franks and Kjell Nyborg

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: This paper, focusing on the UK insolvency code, shows how the efficiency of reorganization is affected by the distribution of control rights. Control rights raise particular problems when creditors have different incentives to keep the firm as a going concern. Such differences may arise from the possession of private benefits by particular creditors; e.g. valuable business relationships which are lost if the debtor firm is liquidated. We show that the incidence of inefficient liquidations, resulting from the failure to preserve private benefits, is influenced by the size and seniority of creditors' claims. The current UK code is widely thought to give rise to inefficient liquidations (see, for example, Aghion, Hart and Moore (1992), Webb (1991), and White (1992)). This view is based upon the creditor oriented nature of the code. We show, however, that the inefficiency depends upon whether the controlling creditor in formal bankruptcy has private benefits. Our model yields predictions which are similar to the empirical findings for the United States: deviations from absolute priority are larger in workouts than in formal reorganization (Chapter 11). This is a symptom of any code where one party has a credible threat to take the firm into formal reorganization and waste assets, imposing a disproportionate cost on some creditors.

Keywords: Insolvency; Workouts Versus Formal Bankruptcy; Non-Cooperative Bargaining; Control Rights; Debt Structure; Information Asymmetry (search for similar items in EconPapers)
Date: 1994-04
References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Control Rights, Debt Structure, and the Loss of Private Benefits: The Case of the U.K. Insolvency Code (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprfm:0047

Ordering information: This working paper can be ordered from

The price is 4.00 pounds or 8.00 dollars per paper.

Access Statistics for this paper

More papers in CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().